Investors losing confidence in China
Global poll • The once-attractive economy gets the worst rank since 2010.
Published: September 7, 2012 12:15PM
Updated: September 7, 2012 12:17PM

Washington • Global investors are losing faith in China, giving the country’s markets their worst rating in more than two years in the latest Bloomberg poll.

About a quarter of those surveyed say they expect Chinese markets to be among the worst performers over the next year. That’s the highest negative reading that the country has received in the quarterly Bloomberg Global Poll since January 2010 and was second only to the 45 percent rating that the European Union received in the Sept. 4 survey.

China “will suffer disproportionately from a global slowdown in growth,” said Benjamin Dunn, a poll participant and chief operating officer in Crested Butte, Colo., for portfolio management company Alpha Theory, in an email. It “will be unable to prevent a hard landing” of its economy.

The United States again came out on top in the poll of 847 investors, analysts and traders who are Bloomberg subscribers: 46 percent say its markets will be among those offering the best returns over the next year, the same as in the previous survey in May. Close to three-quarters expect the Federal Reserve to act next week to support the economy, either by extending its pledge of low interest rates, buying bonds, or by doing both.

Commodities in general and gold in particular gained favor with investors in the poll. Eighteen percent of those surveyed expect commodities to offer the highest returns over the next year. That’s up from 13 percent in May and was second only to stocks, which won the backing of a third of investors. Gold came in third, with 16 percent, up from 11 percent in May.

“Monetary easing by global central banks will push commodity prices higher,” Anuraj Benara, a poll respondent and senior manager of institutional equity sales for SMC Global Securities in Mumbai, India, said in an email.

Some investors also are turning bullish on crisis-racked Europe, though a greater percentage remains bearish. More than one in five picked EU markets as among those that will offer the best returns over the next year. That’s the highest reading for the region since the poll began in 2009 and was second only to the U.S. in the latest survey, which was taken before the European Central Bank decided Thursday on an unlimited bond- purchase program. Brazil was third and China fourth in the poll.

China was a favorite of global investors in the wake of 2008-09 financial crisis, as stepped-up government spending and interest rate cuts powered the economy to a year-over-year growth rate of 11.9 percent in the first quarter of 2010.

Investor enthusiasm for the country has since waned as growth has slackened, first in reaction to government efforts to contain inflation and puncture a property price bubble, and more recently due to a slowdown in Europe. Gross domestic product rose 7.6 percent last quarter from a year earlier, the slowest pace in three years.

More than three of five poll respondents described the Chinese economy as deteriorating, up from less than one in three in May. One-third rated the risk of a hard landing as high, up from 23 percent in May. Another 44 percent saw it as a “medium threat.”

Outgoing Communist Party chief Hu Jintao has held back on steps to spur the slowing economy, raising the risk that the country will miss its 7.5 percent growth target for this year.

“The changing of the political guard in China has slowed the government’s stimulus response,” Kim Caughey Forrest, senior equity analyst for Fort Pitt Capital Group in Pittsburgh, who took part in the poll, said in an email. “It’s pretty clear that current leadership is not going to start new programs, so the lag time is even longer on any stimulus.”

Hu’s standing with investors has suffered ahead of the leadership change later this year. Two in five voiced pessimism about the impact of his policies on the investment climate in the country. That’s up from less than one in three in May and is the highest negative reading since the poll began asking that question two years ago.

“The political environment in China is more favorable to hiding real problems” such as the growing level of non- performing bank loans, said Kevin Guezo, who oversees foreign exchange and interest rate derivative sales at Credit Mutuel Arkea, a French cooperative bank in Lyon, France. Guezo took part in the poll and shared his views in an email.

Investors also have turned more pessimistic about the global economy. About half described it as deteriorating, compared with 37 percent who said that in the last poll. Those in the U.S. were the most downbeat.

The poll also reflects an erosion in investor assessments of the U.S. economy, with 22 percent saying the economy is deteriorating, compared with 18 percent who said that in May.

Federal Reserve Chairman Ben Bernanke is expected to take further steps to promote growth at the central bank’s meeting on Sept. 12-13, according to the poll. More than one in three of those surveyed look for another round of quantitative easing, or bond buying, from the central bank.

Bernanke has made “it patently clear that the Fed will take any action it feels it needs to to try and address its mandate - full employment and stable prices,” Forrest said. “Given the economy has probably slowed, from all the signs we observe in government and company data, we think he” will go ahead with QE.

The Fed, which cut its target for the federal funds rate to zero to 0.25 percent in December 2008, has said it expects to keep the overnight interbank lending rate “exceptionally low” at least through late 2014. A majority of investors polled do not see the Fed raising rates before 2015, with 16 percent saying an increase won’t come until 2016 or later.

The low rates have helped the housing market. The S&P/Case- Shiller index of home prices in 20 cities climbed in June from a year earlier, the first gain since September 2010, according to a report from the group last month.

Forty-six percent of investors surveyed expect U.S. house prices to increase further in the next six months. Only 14 percent see them falling.

Investor enthusiasm for stocks ebbed in the latest survey. Thirty-seven percent say they plan to increase their holdings of equities in the next six months, down from 40 percent in May and the lowest since that question was first asked in 2010.

The increased caution is most evident when it comes to Asian markets. One third forecast that the MSCI Asia Pacific Index will be higher six months from now -- the least bullish reading in almost two years. The stock gauge rose 0.1 percent yesterday to 115.94 after falling on Wednesday to its lowest level since July 27.

An increasing number of investors are attracted to gold, according to the poll. A majority expect gold prices to be higher in six months’ time, while about one in three intends to increase their holdings of the yellow metal.

Oil is also gaining favor among investors, according to the poll. One in five plan to increase their exposure to oil in their portfolios over the next six months, up from 14 percent in May.

More than two in five see prices rising over that time frame, roughly double the amount who project them falling. Crude oil for October delivery advanced 17 cents to settle at $95.53 a barrel on the New York Mercantile Exchange yesterday.

Twenty percent rate the risk of a Middle East war as high, up from 15 percent in May.

As has been the case since October 2009, bonds were picked as the asset class projected to have the worst returns over the next year.