Investors exit EMs post Trump victory, buy into US markets: BofA-ML

35% of the fund managers surveyed expect the global growth to remain strong over the next 12 months, up from 19% in the last month

Donald Trump’s victory in the US presidential election has triggered a sell-off in emerging market (EM) equities that have seen their biggest month-on-month (m-o-m) drop in allocation by fund managers since February 2011, suggests a survey by Bank of America-Merrill Lynch Fund Manager. 

Allocation to EM equities by fund managers, according to the survey, has dipped sharply to net four% overweight, compared to 31% overweight last month.

The surprise outcome has seen investors buy into the US equities, and has accelerated rotation into banks as investors’ cash out of high dividend and bond proxies like utilities and telcos, the survey findings suggest. Overall, 44% of those surveyed believe the rotation to cyclical stocks and inflationary sectors will continue well into 2017.

The November Global Fund Manager Survey was conducted between November 9 and 14 after the US election results. According to BofA-ML, 177 clients with $456 billion of assets under management (AUM) participated in the survey.

Though fund managers, over the past few months, have remained cautious given the fears of a global economic slowdown, the BofA-ML survey says the outcome of the US presidential election is being seen as unambiguously positive for nominal gross domestic product (GDP). 

Global growth is to remain strong over the next 12 months, 35% of the fund managers surveyed expect, up from 19% last month. This is the highest reading in the past 12 months. As a result, cash levels with fund managers have dropped from 5.8% to five% in November, the largest m-o-m drop since August 2009.

Global inflation expectations, too, have soared to the highest percentage since June 2004, with a net 85% (net 70% last month) of the fund managers surveyed expecting a rise in global consumer price index-based inflation (CPI) over the next 12 months. 

Though US equity markets have found favour with investors, allocation to Euro zone equities hit a five-month high, with eight of the fund managers surveyed remaining overweight on the region.

Allocation to the UK equities, however, dipped to a six-month low, as a net 35% of fund managers remained underweight in the region in November compared with 27% in October.

"Global investors' equity allocations towards the UK are at their second lowest level since 2008, with the sterling considered the most undervalued in the history of our long-running survey,” said Manish Kabra, European equity quantitative strategist at Merrill Lynch.

The biggest equity driver over the next six months, , 48% of fund managers say, will be treasury yields, while 24% say the dollar will be the momentum.

“There will likely be a trade in ‘bond proxies’ soon. But, our cyclical view of peak liquidity, globalisation and inequality means the ‘yield’ dam has been broken,” said Michael Hartnett, chief investment strategist at BofA-ML.

"Intention to own EU stocks has also dropped and pessimism towards both the euro and sterling appears to be entrenched. The coming Italian referendum is also weighing on sentiment, with Italian stocks being the least preferred in Europe," the survey says.

As regards potential risks to financial market stability, 84% of those surveyed have put protectionism at the top of the list, followed by monetary risk (higher rates, more volatile currencies) at 73%, geopolitical risk (69%), and emerging market risk (31%).