In a short span of two weeks, the sentiment on risk trades has changed. The Bank of America Merrill Lynch Global Fund Manager survey suggests that the appetite for risky assets (read equities) is down, thanks to the rising spectre of deflation. The Fund Manager Survey says the oil price collapse has led to big rotation out of energy & materials, into US dollar, cash, Eurozone, global tech & discretionary stocks. Consensus view is now long deflation, cash & the US dollar, and short inflation, risk and commodities. However, India continues to be the top pick among Asia Pacific investors in GEMs/Asia.
While 67% fund managers surveyed believe that the best performing asset class in 2015 would be equities, 22% believe it would be currencies & commodities, 4% government bonds and 2% think it would be corporate bonds. The big risk to the world economy is no longer inflation but deflation, which is adequately symbolised by the rout of oil, as demand is unlikely to match increase in supplies.
Despite the big rotation out of energy, materials and commodities, the survey says it is surprising that allocation to GEM (globall emerging markets) equities has increased to net 1% overweight from neutral last month. However, despite the overweight, the allocation to GEM equities is below long-term average. The biggest tail risks for the global markets will come from geopolitics believe 23% of managers surveyed, while 22% believe it will come from Eurozone deflation. And 16% believe China debt defaults could pose a risk in 2015.