Signs of a ‘buyers’ strike’ have emerged as fund managers dumped global equities in favour of cash, notwithstanding the strong start to the year for markets, according to the latest Bank of America Merrill Lynch Global Fund Manager Survey.
The survey, which drew responses from 218 participants with $625bn in assets under management, showed that global equity allocations had slumped in the early days of February.
Allocations to global equities have fallen by 12 percentage points to a net 6 per cent overweight – the lowest level since September 2016. The so-called buyers’ strike was accompanied by a sharp increase in the percentage of managers who believe the S&P 500 has already peaked.
Source: BofA Merrill Lynch Global Fund Manager Survey
There was also a significant rotation into cash, as a net 44 per cent of respondents claimed that they were now overweight – the biggest such position since January 2009 at the height of the global financial crisis.
Elsewhere, allocations to bonds increased allocations – albeit to a net 36 per cent underweight – to their highest since the Brexit vote in June 2016. ‘Safe haven’ real estate fell slightly to a net 1 per cent overweight position among investors although it remains above the long-term average.
Fund managers remain negative on the prospects for the global economy in February, with a net 46 per cent expecting growth to weaken over the next 12 months, although this is up from December’s net 60 per cent.
Furthermore, a net 42 per cent of respondents believe that global profits will deteriorate over the coming 12 months, although this figure has improved slightly since January – which itself was the worst monthly outlook since December 2008.
The survey also revealed that a net 20 per cent of asset allocators were taking lower than normal risk levels, although a slight improvement on the previous reading in December, it remains below the average of 13 per cent over the past five years.
Yet, the bank’s chief investment strategist Michael Hartnett said while investor sentiment remains bearish, positioning is still positive for risk assets and BofA ML’s ‘Cash Rule’ continues to send out a buy signal for equities while its Bull & Bear Indicator hit buy territory in early-January.
The reasons behind ongoing bearishness among market participants can be found among the tail risks highlighted by managers in the latest survey.
The biggest tail risk for fund managers remains a US-China trade war, which has topped concerns for 11 of the past 12 months as US president Donald Trump has continued to take a tough stance against what he considers an unfair relationship. However, concerns are no longer as dominant as they were at the peak in July 2018, as rhetoric has calmed and planned tariffs delayed.
A China slowdown is the next biggest tail risk for investors, while a corporate credit crunch and US politics have emerged as significant new tail risks.
Concerns over corporate indebtedness remain high, with a net 46 per cent of respondents thinking that balance sheets are overleveraged and a net 51 per cent believing more action should be taken to de-lever at the expense of cash being used for capital expenditure, dividends and buybacks.
Fears of quantitative tightening have reversed following January’s meeting of the Federal Reserve’s Federal Open Market Committee, which indicated that the pace of rate hikes would slow and may not even rise at all in 2019.
Source: BofA Merrill Lynch Global Fund Manager Survey
A return to the theme of ‘secular stagnation’ – a longer-term period of little or no growth – was also confirmed, as bearish managers’ expectations of low growth and low inflation for the global economy signalled a return to post-crisis conditions.
Investors have begun to position accordingly, adding to healthcare, technology and consumer discretionary holdings, while underweighting utilities and cyclical sectors such as industrials and resources.
While there has been some rotation into new areas of the equity market, the most crowded trade is a new one: long emerging markets.
This has overtaken long US dollar and long FAANG + BAT (Facebook, Amazon, Apple, Netflix and Google-parent Alphabet plus Baidu, Alibaba and Tencent) as the most crowded trade.
The long emerging markets trade could be seen in managers’ portfolio during February, as the most popular regional overweight. Allocations climbed eight percentage points to a net 37 per cent overweight this month and represents a sharp turnaround from September when a net 10 per cent of respondents were underweight.
There were also some other significant changes in regional equity allocations among allocators this month.
Allocation to US equities moved into negative territory and the lowest position for nine months, with a net 3 per cent now underweight, reflecting managers’ belief that the market peaked last year.
As such, the US equity market is now the second most-underweighted region among respondents, although it has some way to fall before catching the most hated: the UK.
There was some good news for UK equities, however. Despite having been the most underweighted region since February 2016, allocations rose by 13 percentage points month-on-month to a net 25 per cent underweight. Yet, Brexit negotiations are continuing just several weeks from the UK’s planned departure date from the EU.
Source: BofA Merrill Lynch Global Fund Manager Survey
Conversely eurozone equities moved to an overweight in portfolios ending an 18-month trend of allocation cuts. After sitting at the biggest underweight position since August 2012, the region now represents a net 5 per cent overweight.
In addition, allocations to Japanese equities have rebounded – rising by 11 percentage points to a net 10 per cent overweight having been underweight for the first time since November 2016 last month.