Fund managers remain bearish about the outlook for the global economy and corporate profits but have also begun taking on more risk, according to the latest Bank of America Merrill Lynch Global Fund Manager Survey.
The bank’s first survey of 2019, which drew responses from 177 participants with $494bn in assets under management, revealed that the bearishness seen at the end of 2018 had continued into the new year.
As the below chart shows, both global growth and profits expectations for the coming 12 months have crashed to levels not seen since the height of the financial crisis in 2008.
Fund manager global macro expectations
Source: BofA Merrill Lynch Global Fund Manager Survey
Indeed, a net 60 per cent of respondents to the survey expect global growth to weaken over the next 12 months, up from 53 per cent in December.
Furthermore, a net 52 per cent of managers think the global profits outlook will deteriorate in the coming 12 months, the worst outlook since December 2008.
Despite more bearish sentiment about prospects for the economy and corporate earnings, just 14 per cent of asset allocators expect a global recession in 2019, with managers instead anticipating secular stagnation for the next two-to-three quarters.
“Investors remain bearish, with growth and profit expectations plummeting this month,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch. “Even so, their diagnosis is secular stagnation, not a recession, as fund managers are pricing in a dovish Fed and steeper yield curve.”
Indeed, the survey revealed that inflation expectations have plunged – with just 19 per cent expecting global CPI (consumer price index) inflation to climb higher over the coming 12 months, down from 82 per cent last April.
Such a development would reduce pressure on the Federal Reserve to continue with its rate-hiking programme.
It also signalled an inflection point for the yield curve with just a net 7 per cent of managers expecting a flatter curve, down from 30 per cent in December.
Growing concerns over the corporate sector have been fuelled by the amount of debt currently being taken on by companies, as a net 48 per cent of fund managers claim that corporate balance sheets are overleveraged.
The Institute of International Finance (IIF) recently noted that debt in the US non-financial business sector now stood at 46 per cent of GDP, higher than it was at the onset of the global financial crisis.
Furthermore, the IIF noted, rising borrowing costs as a result of Fed rate-hiking policy could make it difficult for many medium-to-large firms to service debt, while smaller companies could be vulnerable to higher short-term borrowing costs and a potential slowdown in corporate earnings growth.
Source: BofA Merrill Lynch Global Fund Manager Survey
As such, half of respondents to the BofA Merrill Lynch survey said their most preferred use of cash flow was to improve balance sheets, with just a net 39 per cent of respondents calling for profits to be used for capital expenditure – the lowest level since October 2009.
While fund managers have become more bearish about the corporate outlook and more negative about the global economy, there are signs to suggest that they used the December dip in markets to add to equity allocations.
Many of the bank’s rules and tools point to a more defensive investment environment, but also suggest that the bulk of the bear moves have now passed.
In January, equity allocations rose by two percentage points to a net 18 per cent overweight following on from a two-year low recorded in December.
Bond allocations were also down by seven percentage points, moving to a 42 per cent net underweight after hitting a two-year high in December.
However, cash holdings also increased rising to a net 38 per cent overweight and well above the long-term historical average of 20 per cent. Elsewhere, both real estate and commodities saw increased allocations at the start of January.
While there was an increase in equity allocations for January, managers reduced exposure to US equities, which now represent just a 1 per cent overweight in portfolios.
Indeed, emerging markets remain the most favoured equity region for asset allocators after a further 11 percentage point rise in allocations to a net 29 per cent overweight.
Not all equity regions are in favour, though.
January saw a big one-month fall in Japanese equity allocations, dropping by 11 percentage points to a net 1 per cent underweight – the first underweight position since November 2016.
Allocators continued to cut their exposure to eurozone equities meanwhile – a trend that began during the fourth quarter of 2017 – moving to an 11 per cent underweight, the largest such position since August 2012.
The most avoided region for equities remains the UK. Despite a slight increase in January, it continues to be the most underweighted area of the market, representing a 38 per cent net short position in allocators’ portfolios.
On an industry sector basis, investors remain long in healthcare and technology stocks and short in industrials and materials.
Given the ongoing friction between the US and China over trade, a trade war remains the biggest tail risk for fund managers. However, it now figures less prominently with funds managers with just 27 per cent of investors fearful that the current tit-for-tat measures could spill over into a full-blown trade war.
Elsewhere, ‘long US dollar’ positions was the most crowded trade for the second month running, having overtaken ‘long FAANG & BAT’ – the five largest US tech names and three Chinese giants – in December.
Source: BofA Merrill Lynch Global Fund Manager Survey
As the chart above demonstrates, respondents to the survey believe that the US dollar is at its most overvalued since the summer of 2002; it stands at a 16-year high.
Conversely, emerging markets currencies have never been cheaper with respondents labelling them overvalued reaching an all-time low since the question was introduced to the survey in 2004.