If you want to follow the lead of professional money managers, stay clear of emerging markets and instead jump headfirst into U.S. and Japanese stocks.
That is the gist of the latest monthly fund manager survey from Bank of America. The survey of 238 panelists found that there is a major shift going on among the pros – or part of what Bank of America strategist Michael Hartnett calls the Great Rotation.
"With the support of a host of buy signals in recent weeks, the 'Great Rotation' is in full force," he said in a note. "Our positive view of equities would be further reinforced if the loss of faith in China's growth story turns out to be overdone."
For sure, views on China are grim. A net 65 per cent of respondents believe that the country's economy will weaken over the next 12 months, marking a contrast with confidence in the global economy. And that means declining interest in emerging markets, where a net 44 per cent of respondents see the worst outlook of any region for corporate earnings. That marks an 18-point decline from the last survey.
As for investing in emerging market stocks, the news is also downbeat: A net 18 per cent of managers are underweight the region, down from a net overweight position two months ago and the lowest reading in the survey since 2001.
Respondents are also down on commodities and bonds.
But the survey is far from negative on other regions. Among developed markets, respondents are on-side with Japan's efforts to provide monetary stimulus and see Japanese corporate profits rising by double-digits over the next year. A net 27 per cent are overweight Japanese stocks, up 10 points from last month.
Only U.S. stocks top that level of enthusiasm, where a net 29 per cent of respondents are overweight, up 4 points since the last survey.
The question is how to interpret this survey. On the one hand, this is the smart money we're talking about here: The respondents have a combined $643-billion (U.S.) of assets under management, giving their views considerable heft.
On the other hand, their views merely mirror market activity. Japanese and U.S. stocks have led the world's market gains in 2013, while emerging market stocks (including China) have stumbled about 10 per cent. If the enthusiasms of fund managers merely follow market trends, then the survey really just tells you where money already is, not where it is headed.
Certainly, the survey stands in contrast to at least one other view on expected market returns. GMO, the global asset manager, updated on Tuesday its asset class forecasts for the next seven years – with views that look as though they move in the opposite direction to other pros.
GMO is particularly upbeat about emerging markets, seeing the potential for 7 per cent returns annually, after factoring in inflation. Among the asset classes they forecast in their outlook, that's as good as it gets – and it's up from an expected 5.9 per cent annual return in the first quarter and 5.6 per cent in the fourth quarter of 2012. In other words, they see recent weakness in these stocks as an opportunity.
Continuing their contrarian streak, GMO sees slightly negative annual returns for U.S. large-cap and small-cap stocks over the next seven years – or among the worst of the asset classes they forecast.
It never hurts to see what the smart money is doing with their billions. Betting against them takes more guts – but can also be rewarding.
David Berman