A rising number of Asia Pacific fund managers expect weaker economic growth and smaller corporate profits in the next 12 months, according to a monthly Merrill Lynch survey.
However, despite the weaker outlook, more managers said regional stocks were still undervalued on a technical basis and that they believed the case for owning Asia Pacific ex-Japan equities was getting stronger.
Fifty-two percent of the 25 Asia Pacific specialists interviewed on September 10 expected slower economic growth, up from 37 percent from Merrill's August survey. Twenty-four percent said the growth outlook would improve, down from 37 percent from August.
As for earnings growth, 64 percent said it would deteriorate, while 28 percent expected an improvement. In the previous month's survey, 50 percent expected profit growth to weaken.
"Investors have lowered their EPS (earnings per share) growth forecast to +8 percent, 5 percentage points lower than the peak recorded at the beginning this year," Merrill said.
Malaysia and Hong Kong were the strongest overweights, followed by South Korea, Thailand and Indonesia, while Australia and China were the least loved markets.
"A rate hike in China has become consensus amongst regional fund managers, leaving that market further out of favour," the US investment bank said.
China has been taking measures to slow down its booming economy, which grew more than 9 percent in the second quarter on the year as excessive investment and credit growth in recent months have helped fuel inflation.
On Monday, Beijing reported investment and money supply growth had slowed, but stubbornly high inflation suggested it was too early to rule out further steps to cool the economy, the world's seventh largest. The data kept alive speculation that China may raise rates for the first time in nine years.
Eighty percent of the respondents said Asia ex-Japan stocks were undervalued, up from 67 percent in August, while those who said they were fairly valued fell to 20 percent from 30 percent.
Forty percent of asset managers said the case for owning regional equities was getting stronger, an increase of 7 percentage points from the August polls. Those who said it was weakening fell to 12 percent from 20 percent.
Consumer staples, energy and banks were the biggest overweights, while media, utilities and autos were the least liked sectors.