Sound judgement on political, economic and public policy trends in the BRICs (Brazil, Russia, India and China) has never been more vital.

After all, key emerging economies are driving global markets, not only via burgeoning exports and in the scramble for scarce raw materials, but also in their growing financial muscle, which promises to alter the balance of international financial power.

However, based on Merrill Lynch’s Latest Survey of Fund Managers who control more than $700 billion in assets, the emerging economies of China and India are watching money flood out to America over inflation fears.

The percentage of fund managers who felt that emerging market stocks have become overvalued reached double digits in June at 21%, marking a stark departure from the single digit showings of 5% in May and 6% in April.

The next logical question would be if traders and investors are perhaps adjusting their emphasis and preference in relation to the emerging economies, specifically China and India as the biggest investment hotspot. The survey seems to suggest so. The world’s fund managers are pulling their money out of China and India on mounting fears of inflation and are now more pessimistic about global equities than at any time in the past decade. The exodus from China reached new levels this month as investors slashed their net “weighting” position to -58, down from -14 in May, suggesting investors no longer believe that the bloc has a grip on inflation.

Furthermore, India fell to -63 as investors took fright at the country’s budget and trade deficits. There are also some concerns over a relapse towards Nehru-era policies after Delhi halted trading in a range of commodity futures and restricted rice exports. The prospect of India correspondingly increasing its already major impact on the world economy hinges on a fine balance of strengths and weaknesses in the country’s political economy.

In terms of regions: the survey also showed that Europe has become an unpopular region. Eurozone retail sales have been worse than in the US on a year-on-year basis and eurozone GDP growth has also been worse. With a pessimistic growth outlook comes a less favorable perception of monetary policy as investors start to worry about inflation.

A record number net 29% are now underweight on European equities and what’s more, the resignation of Sir John Gieve - The Bank of England’s deputy governor for financial stability, will not help the overall economic sentiment which is a sign of weak formulated policy consequently leading to additional market instability. Currently, a net 38 percent of asset allocators are underweight U.K. equities.

It is evident the market is waking up to the idea that global interest rates are too low. Additionally, investors’ fears of stagflation are crystallizing as they face up to the possibility that interest rates might have to rise as the global economy slows, suggesting global growth and profit expectations could deteriorate. As a result, they have acted by reducing exposure to both equities and bonds and moving into cash. A net 42% of asset allocators are overweight cash, up from a net 31% in May.

America, on the other hand, seems to be coming back into favor with investors quietly rotating back into Wall Street. The U.S. is still seen as a place where trusted institutions command a premium. A net 23% are overweight US equities, the highest since August of fiscal 2001.

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Ron Haruni

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