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Fund Managers’ Pessimism Grows on China Recession Worries

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Concerns about emerging markets and China have rattled global investors’ confidence in the world’s economic outlook and prompted them to adopt a “risk-off” stance, according to BofA Merrill Lynch’s latest fund manager survey.

Participants in the survey, released Tuesday, expressed increasing worries about the threat of a recession in China. In last month’s survey, more than half of fund managers said they considered China the biggest “tail risk.”

(On Monday, Citigroup’s top economist, Willem Buiter, reported that the bank put the odds of a global recession led by China at 40%.)

Investors’ sentiment toward global emerging markets soured further in September out of concern over a potential debt crisis. Underweights were at a record net 34%, up from net 32% in August.

Asset allocators’ risk appetite significantly ebbed since August, with equity overweights down a net 24 percentage points in a month and commodity shorts extended.

In addition, hedge fund net exposure and perception of market liquidity conditions in September were both at the lowest level in three years.

The survey found that cash balances had returned to the 2008 crisis level of 5.5% in September. This is where they were in July before dropping to 5.2% in August.

Since August, investors have revised their expectation of an imminent U.S. Federal Reserve rate increase from September to sometime in the fourth quarter.

Some analysts support this view. A report published last week by Goldman Sachs suggested that Fed policymakers may leave rates unchanged this week if they decide that the market has sufficiently tightened financial conditions.

A total of 214 panelists with $593 billion of assets under management participated in the Fund Managers Survey from Sept. 4 to Sept. 10.

— Check out 4 Market Movers El-Erian Is Watching on ThinkAdvisor.