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Investors are betting emerging markets will be among next year’s winning asset classes, wagering a coronavirus vaccine will help spur a global economic recovery, according to a survey of fund managers by Bank of America.

The monthly report, which gathered views of fund managers collectively holding $526bn in assets, highlighted that the bullishness on emerging markets is part of a broader rotation theme, which has also boosted small-caps, value stocks and banks.

Investors began switching from pandemic winners, such as technology stocks, into sectors tied to a rebound in the economy after Pfizer and BioNTech announced strong early results from the trial of their Covid vaccine on November 9. A similar vaccine from Moderna also proved to be effective in its trial, the company said this week.

Emerging market equities have climbed 2.3 per cent since the Pfizer announcement, taking their gain for the year to just under 8 per cent, according to MSCI.

Bank of America said half of the interviewees indicated emerging markets as their favourite trade for 2021, ahead of the S&P 500 and oil. Meanwhile, a growing number of investors believe emerging market currencies are undervalued.

“The vaccine announcements provided another boost for emerging market risk sentiment,” said Andreas Kolbe, a strategist with Barclays. “These results have likely removed some pessimism about the medium-term trajectory of the virus and its consequences on the global economy.”

He added lower volatility should boost emerging market assets, particularly currencies and credit.

“We expect emerging market local markets to rally across the quality spectrum,” he said.

The progress in the fight to curb the spread of the virus has helped to bolster risk appetite. The amount of cash investors are keeping in their portfolios fell to 4.1 per cent, according to the bank, similar to the level in January before coronavirus rocked global financial markets.

Michael Hartnett, chief investment strategist at BofA, said the decline in cash levels was often a signal of investor exuberance.

“We are starting to see some extreme measures of sentiment, as cash levels are low and equity allocation is high,” he said.

Despite the progress in the fight against the virus, the survey showed 41 per cent of fund managers saw the Covid-19 pandemic as the main “tail risk” although they now expect a “credible vaccine” to be delivered in mid-January, one month ahead of the previous timeline.

Investors polled by the investment bank warned that bets on large US technology companies remained a crowded trade. The pandemic has benefited many of those businesses as consumers live more of their lives from home and use their computers to work or order food. Growth companies such as Amazon, Microsoft and Facebook have posted strong gains since the coronavirus outbreak.

Still, about one in four investors predicted value stocks would outperform growth stocks, the highest level since February 2019 and a sign that they see a brighter outlook for the real economy.

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