CICC's latest research report, drawing on the Bank of America Merrill Lynch September global and Asian fund manager surveys, indicates that global investor sentiment has cooled from the elevated levels seen in August. The average cash holding ratio rose to 3.9% in September, up from 3.5% the previous month.

Notably, bond yields have now overtaken AI as the primary tail risk, cited by 33% of respondents compared to 27% in August. Meanwhile, the proportion of investors viewing the AI bubble as the biggest risk has decreased to 28%, down from 32% previously. A significant 79% of those surveyed believe there will be no reduction in capital expenditure by 2026, a marked increase from the 71% who held this view in August.

Within the Chinese market specifically, foreign investors maintain a strong preference for AI and semiconductor stocks, selected by 55% of respondents. This is followed by interest in state-owned enterprises (25%) and dividend-yielding stocks (15%). As a hedging strategy against AI-related risks, a growing number of investors, now 25% compared to 18% in August, are rotating towards defensive sectors.

Global Fund Manager Survey Highlights

September data reveals a retreat in investor sentiment from its August peak, with cash levels climbing to 3.9% from 3.5%. Expectations for a stronger global economy have also waned, with the percentage of optimists falling to 8% from 14% in August. The narrative of a global economic "no-landing" scenario slightly dipped to 55%, while those anticipating a "soft landing" rose to 38% from 34%. Only 2% of investors are bracing for a "hard landing".

The perception of risk has shifted, with rising bond yields now considered the most significant tail risk by 33% of investors, surpassing AI concerns, which have dropped to 28% from 32%. For the first time since September 2022, investors are anticipating a flattening of the yield curve. The proportion expecting higher interest rates has climbed to 36%, the highest level in a similar period, although 25% still believe monetary policy is stimulative.

In terms of market positioning, being long on semiconductors remains the most crowded trade, cited by 53% of respondents, a figure unchanged from August. Shorting US Treasuries is the second most crowded trade at 18%. Regarding capital expenditure, 79% of investors do not expect hyperscale cloud providers to announce cuts by 2026, up from 71%. Furthermore, 42% identify AI hyperscaler capex as the most likely trigger for credit risk, an increase from 38%.

As the US midterm elections approach, 44% of investors anticipate a divided Congress with Democrats controlling the House and Republicans the Senate. Expectations for a Democratic sweep have risen to 31% from 23%. In the event of such a sweep, 45% of investors predict that markets would react negatively with rising interest rates and falling stock prices. During September, investors increased allocations to insurance, healthcare, and industrials, while reducing positions in REITs, consumer staples, and communication services.

Asian Fund Manager Survey Insights

Expectations for China's economic growth have noticeably weakened in September. However, the outlook for corporate profits in Asia ex-Japan has improved, with 55% of investors expecting profit growth over the next 12 months, up from 45% in August. Within the Asia-Pacific region, Japan remains the most favored market with a 45% overweight rating (down from 50%), followed by Taiwan at 40% (down from 55%) and Korea. Conversely, investors remain underweight on mainland China, albeit to a slightly lesser degree, with a net underweight position of -15% compared to -18% in August.

Within the Chinese market, the AI and semiconductor sectors are the top picks for foreign investors (55%), followed by state-owned enterprises (25%) and share buybacks/dividends (15%). While sentiment towards the semiconductor cycle in Korea and Taiwan has recovered to 35%, it remains significantly below the 60% peak seen in July. As a hedge against AI positions, a growing number of investors (25% vs 18% in August) are shifting towards defensive sectors, with the rotation into value and cyclical stocks considerably slowing to just 5% from 41% previously.