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Global fund managers cautious on equities; geopolitics, Covid-19 key risks

The biggest tail risk, according to the survey, remains a second wave Covid-19 infections.Illustration: Binay Sinha
Global fund managers remain cautious on equity as an asset class despite the sharp recovery in frontline major indices across the globe, with those at BofA Securities terming the up move as a ‘bear market rally.’ While those at HSBC doubt whether the recent rally will sustain, analysts at Morgan Stanley say geopolitics and Covid-19 infections remain key risks.

A record 78 per cent of investors surveyed by BofA Securities believe markets are most ‘overvalued’ since 1998. Just 18 per cent among those surveyed expect V-shaped recovery in the economy and markets versus 64 per cent expecting U- or W-shaped recovery. “37 per cent now say it's a bull market, 53 per cent majority still say it's a bear market rally,” BofA Securities said in its fund manager survey for June. The biggest tail risk, according to the survey, remains a second wave Covid-19 infections.

Meanwhile, cash levels with fund managers dropped in June to 4.7 per cent from 5.7 per cent last month, as fear of prolonged recession fell to net 46 per cent in June versus 93 per cent in April, BofA's survey of 212 fund managers with $598 billion in assets under management (AUM) showed.

On the other hand, HSBC’s Emerging Markets (EM) Sentiment Survey for Q2-2020 reveals around 75 per cent of the investors surveyed are neutral to bearish (38 per cent bearish, 37 per cent neutral) on EM prospects over the next three months despite a substantial rally. The survey was conducted between May 12 and June 2 among 213 investors from 198 institutions, representing over $600 billion of assets under management in EM. In stark contrast to the BofA survey, HSBC suggests cash levels with EM fund managers remain sizeable, with more than 50 per cent of investors holding over 5 per cent of their AUM in cash.

“More investors expect the world economy to recover from the Covid-19 shock later than H2-2020.Meanwhile, investors noted that in the equity markets Brazil, Turkey and India had a more negative outlook,” the HSBC survey findings suggest.

Though analysts led by Jonathan F Garner, chief Asia and emerging market strategist at Morgan Stanley have marginally raised target levels for key indices across the globe, they continue to see geopolitics and Covid-19 impact on growth (ex-North Asia) as key bear-case risks to their forecasts.

“Our equity market targets (now for June 2021) move up, although our view remains cautious and we expect a lop-sided "W" formation to take place over the next 3-6 months. We raise our target for TOPIX to 1,550 (-1 per cent from spot), for MSCI EM to 920 (-7 per cent) and for MSCI China to 84 (-1 per cent). Only for CSI 300 (target now 4,150, +4 per cent from spot) do we have upside,” they wrote in a June 15 report. As an equity strategy, they remain overweight Japan and China-A shares, but upgrade Indonesia and Greece alongside overweight in Singapore, China, India, Russia and Brazil.

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