Fund managers across the globe have reduced their exposure to equities during the ongoing market rally, according to a closely watched survey, despite expectations of improving fundamentals.
The latest Bank of America Merrill Lynch (BofA ML) Global Fund Manager Survey found that asset allocators’ global equities positioning fell to an overweight of just 3 per cent in March.
This is the lowest weighting to stocks since September 2016, when investors were nervous ahead of the US presidential election. BofA ML’s analysts pointed out that the allocation to equities has only been negative once in the past six years.
Global asset allocators’ equities positioning
Source: BofA ML Global Fund Manager Survey
The report also highlighted the tail risks that fund managers are most concerned about.
The list of risks was topped by a slowdown in Chinese growth, which was cited by 30 per cent of those participating in the survey. China’s economy is the second largest in the world but has been slowing in recent years, leading the authorities to unveil new stimulus measures.
Investors are also worried about the US-China trade dispute, although the number citing this as their main tail risk has fallen as the two countries hold talks on resolving the spat.
Other concerns include a corporate credit crunch, US politics, quantitative tightening, market structure and European elections.
However, the nervous sentiment around stocks comes at a time when asset allocators are growing more confident in their outlooks for economic growth and company profits.
The survey – which polled 186 participants with assets under management of $557bn between 8 and 14 March – found that global growth and profit expectations rebounded strongly for the second month in a row.
A net 25 per cent of asset allocators think the global economy will worsen over the coming 12 months. Although this is a downbeat reading, it does represent an improvement from more than a net 45 per cent expecting a deterioration last month and a balance of 60 per cent in January; that said, growth expectations are still low compared with the survey’s history.
The extremely easy central bank policy backdrop is the primary driver of improving macro sentiment; a net 39 per cent of investors now think liquidity conditions are positive, up 16 percentage points from last month and the biggest two-month improvement since the third round of quantitative easing was launched in September 2012.
Global asset allocators’ profit expectations
Source: BofA ML Global Fund Manager Survey
When it comes to profits, a net 28 per cent think they will deteriorate in the next 12 months. Despite the balance being negative, this is an improvement of 14 percentage points on February’s reading and 24 percentage points from January’s, which was the worst outlook since December 2008.
But it cannot be ignored that the fact managers are expecting profits to decline is a “major reversal” from January 2018, when a balance of 44 per cent thought they would improve.
Meanwhile, more than one-third of fund managers surveyed by BofA ML believe the Federal Reserve has finished with its interest rate hiking cycle. Indeed, the fed funds futures markets are pricing in 13 basis points of rate cuts in the next 12 months.
Furthermore, the bank’s ‘Cash Rule’ suggests improving risk appetite as managers’ cash levels dropped to 4.6 per cent but remained in ‘buy’ territory. Under this indicator, a contrarian buy signal is generated for equities when the average cash balance is above 4.5 per cent.
Noting that the equity allocation is low despite all of the above, BofA ML chief investment strategist Michael Hartnett said: “The pain trade for stocks is still up.
“Despite rising profit expectations, lower rate expectations and falling cash levels, stock allocations continue to drop. There is simply no greed to sell in equities.”
Elsewhere, the BofA ML Global Fund Manager Survey showed that the allocation to bonds has slipped 1 percentage point to a net 37 per cent underweight. However, it remains close to the 35 per cent reading of December 2018, which was the highest allocation to the asset class since the Brexit referendum.
The allocation to property stands at a net 6 per cent overweight and is “well above” its long-term average, while commodities are at a 2 per cent underweight despite being the best-performing asset class of 2019 so far.
Net % of fund managers overweight UK equities
Source: BofA ML Global Fund Manager Survey
When it comes to equities positioning, the UK remains the least favoured region – as it has been for quite some time. A net 28 per cent of those polled are underweight the country, although this remains above the maximum bearishness of the 41 per cent underweight seen in March 2018.
The consensus overweight among asset allocators is emerging market equities. The allocation to this part of the market was a net 40 per cent overweight this month, which is a significant turnaround from the 10 per cent underweight of September 2018.
Allocations to US equities are neutral (having been negative in February) while there are underweights to Europe and a small overweight to Japan.