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China Hard Landing Fears Resurface for Fund Managers

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More fund managers are growing increasingly bearish on the outlook for China, believing "a hard landing" for the economy and a "commodity collapse" are currently the biggest tail risks facing markets, a monthly survey by Bank of America/Merrill Lynch showed on Wednesday.

One quarter of fund managers surveyed signaled the scenario as their top concern, compared with 18 percent in April. The survey of 231 panelists, who oversee a combined $661 billion, was conducted from May 3 to 9.

"May's Fund Manager Survey demonstrates a clear exit from China and assets connected to China – in the shape of commodities and emerging market equities," said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.

Separately, the research house on Wednesday downgraded its annual gross domestic product (GDP) growth forecast for the economy to 7.6 percent for 2013 from an earlier target of 8 percent, citing sluggish external demand and base effects. A recent slew of softer economic data, including industrial production and fixed asset investment for April, have prompted economists to recalibrate their projections for the economy.

(Read More: China Shaping Up for Another Disappointing Quarter)

Investors' downbeat sentiment has been reflected in the performance of the benchmark Shanghai Composite, which has fallen 9 percent in the past three months, underperforming its global peers.

Lower growth expectations for China, one of the world's largest consumer of resources, have prompted investors to turn more downbeat on commodities, the survey showed.

(Read More: HSBC: Why We Are Still a China Bull)

Almost 30 percent of asset allocators are underweight commodities – the lowest reading since December 2008 – from 11 percent in March.

The outlook for the commodities sector turned more negative this week after the world's biggest resource company, BHP Billiton, outlined on Tuesday plans to cut billions in capital and exploration expenditure next year. The miner said spending would fall to around $18 billion, down around a fifth from $22 billion estimated in the 2013 financial year.

Bluer Skies for Europe

By contrast, there is growing optimism towards European equity markets, according to the survey.

"Global investors are starting to see the euro zone as less of a problem and more of an opportunity," the bank said. "With more investors viewing the U.S. as overvalued, the valuation gap between the U.S. and the euro zone has widened even further in the past month."

The U.K.'s FTSE 100 and Germany's DAX 30, for example, are trading at a price-to-earnings ratio of 12.6 and 13.7 compared to 17 for the benchmark S&P 500.

Nearly 40 percent of the respondents believe euro zone equities are undervalued, up from 23 percent last month.

By CNBC's Ansuya Harjani

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