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Fund managers fear crash in global bond markets

20 July 2017

BofA Merrill Lynch Fund Manager Survey shows managers are also increasing their Japanese equities overweights as they become more bearish on US.

By Rob Langston,

News editor, FE Trustnet

A crash in global bond markets was identified as the biggest ‘tail risk’ by global fund managers in the latest BofA Merrill Lynch Fund Manager Survey, closely followed by concerns over a policy mistake by the Federal Reserve or European Central Bank.

The survey revealed 28 per cent of fund managers believed a crash in global bond markets was the biggest tail risk, followed by 27 per cent who believed a policy mistake was more likely.

Central banks around the world have begun discussing the prospect of rate increases in the coming months, although uncertainty over the timeline for such action has created some nervousness on bond markets.

Source: BofA Merrill Lynch Global Research

Michael Hartnett, chief investment strategist at BofA Merrill Lynch, said: “Fund managers’ biggest fears are a shock coming from bond markets or central banks. Too many investors see the Fed as a likely negative catalyst.”

Ahead of the July meeting of the European Central Bank (ECB), some had wondered whether president Mario Draghi might announce more details about when and how it might reduce its bond buying programme – though some analysts have warned that any tapering could affect positive sentiment towards the euro.

Ronan Carr, European equity strategist, added: “Investors expect eurozone inflation to rise and find monetary policy too stimulative, putting the ECB’s signalling powers to the test.”

However, the survey revealed that 48 per cent of respondents thought global monetary policy was “too stimulative”, the highest level since April 2011.

It further noted that the impact of any Fed balance sheet reduction was seen as a “non-event” by 42 per cent of fund managers, while 31 per cent thought it would be a risk-off event sending yields up and stocks down.

As the above chart shows, fears over Chinese credit tightening - the biggest risk concerning fund managers in June - receded in July with just 15 per cent of fund managers concerned from more than 30 per cent during the previous month.


Fund manager cash levels remained elevated, although slightly lower than reported levels in June, falling from 5 per cent to 4.9 per cent.

The main reason for managers holding onto cash was bearish views on markets, reported by a quarter of respondents. A further 20 per cent preferred cash over low-yielding equivalents.

Indeed the Global Fund Manager Survey Macro Indicator remains in neutral territory, with a further decline in macro conditions and a cash drop to 4.5 per cent in August signalling a “sell signal”.

Allocations to equities fell in July to a net 38 per cent overweight, while allocation to bonds rose from 55 per cent to 58 per cent over the month. Commodities saw a sharp rise moving from a 15 per cent underweight in June to 6 per cent in July.

The survey also found that global fund managers have made sharp increases to their overweight to Japanese equities moving from a net overweight exposure – the aggregate of long and short positions – to Japan of 1 per cent in June to 18 per cent in July.

The most popular sector for Japanese equities allocations was industrials, while banks remain the largest underweighted position.

It came as managers moved to a net underweight exposure of 20 per cent to US equities, the lowest level for almost 10 years. Indeed, 80 per cent of managers thought that US equities were overvalued, although that has fallen from an all-time high in June, as the chart below shows.

Source: BofA Merrill Lynch Global Research

Among US equities allocations, banks remain the most popular sector. Sentiment towards the banking sector has turned increasingly positive more recently as US regulators have signalled a softer approach. The least popular sector was utilities.


Overweight allocations to eurozone equities fell slightly from 58 per cent to 54 per cent over the month. In emerging markets overweight allocations dropped to 37 per cent from 42 per cent.

Despite a healthy overweight among managers to Europe, scepticism about further improvements in the European economy was apparent as 51 per cent expected it to strengthen in the coming 12 months compared with 61 per cent in June.

Among European fund managers, sentiment towards the major source of Eurozone economic growth remained the global reacceleration with many also expecting a pick-up in capital expenditure.

The most popular country with European managers was France, representing a 43 per cent overweight, followed by Germany at 32 per cent.

The UK remains the least popular country for equity exposure among global fund managers as the average underweight increased to 30 per cent from 23 per cent during the prior month. (Among European fund managers, it represents a net 59 per cent underweight).

Other underweights include Italy, Switzerland and the Netherlands.

Among other monthly changes to global positioning was increased overweights to healthcare, materials and commodities sector, while managers rotated out of technology, consumer discretionary and industrial stocks.

It comes at a time of deteriorating outlook for corporate earnings, with 22 per cent of managers warning against improvement during the next 12 months with a further 17 per cent arguing that corporate balance sheets are overleveraged.

From a style perspective, 28 per cent of respondents to the survey expected value to outperform growth over the coming year, compared with 15 per cent In June.

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