Fears over China grow as European equity sentiment improves

A declining rate of economic expansion in China is among the biggest ‘tail risks’ to the global economy, according to a major survey of fund managers.

The monthly Bank of America Merrill Lynch survey found that 46 per cent of those asked said that a so-called ‘hard landing’ - rapidly falling economic growth rates - in China coupled with a collapse in commodity prices were the major risk overshadowing the global economic recovery.

In addition there was a dramatic decline in the proportion of managers believing that the global economy would strengthen in the next 12 months. Of the managers surveyed in the first week of February, 56 per cent expect the global economy to strengthen, compared with 75 per cent last month.

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The research also found that managers had an average weighting of almost 5 per cent in cash, the highest since the July 2012 survey.

Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, said the cash balances were “sending an unambiguous ‘buy’ signal for risk assets”.

However, he warned that while sentiment towards developed market equities was “firmly bullish” valuations were becoming high.

“We would caution that current valuations in Europe already fully price in the region’s growth outlook,” Mr Hartnett said.

The survey showed 40 per cent of investors believed Europe was the region they most wanted to increase exposure to.