Fund managers across the globe continue to position for a climate of ‘secular stagnation’, asset allocation research shows, tilting their portfolios towards investments that hold up in a falling growth environment.
The latest edition of the Bank of America Merrill Lynch Global Fund Manager Survey found that professional investors are long assets such as cash and defensive sectors, which tend to outperform when economic growth and interest rates are falling.
Conversely, fund managers have less exposure to areas that require higher growth and rates to perform, such as equities in general and banking stocks in particular.
Fund managers positioned for low growth and low rates
Source: BofA ML Global Fund Manager Survey
Two-thirds of respondents to the Fund Manager Survey (FMS) believe the global economy is in a state of ‘secular stagnation’, or in a persistently low growth, low inflation environment. This is the highest level thinking so since October 2016.
“FMS investors added a bit of cyclical risk this month but are still firmly positioned for secular stagnation,” said Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch.
“They are long assets that outperform when growth and rates fall like cash, emerging markets and utilities, while short assets that require higher growth and rates such as equities, the eurozone and banks.”
As Hartnett noted, there are signs that investors have added some cyclical risk since the survey was carried out in March. Asset allocators did increase their weighting to areas like equities (from very low levels in March), the eurozone and commodities.
However, global fund managers scaled back their exposure to banks this month despite willingness to add risk in other areas. Allocators are running a net 1 per cent underweight to global banks, down four percentage points month-on-month to the lowest reading since September 2016.
But the Bank of America Merrill Lynch Global Fund Manager Survey – which polled 187 participants with combined assets under management of $547bn between 5 and 11 April – reassures that investors are not expecting a recession any time soon.
Some commentators have pointed to the recent inversion of the US Treasury yield curve as a sign that a recession is looming. This measure has often heralded a recession in the past but 86 per cent of the survey’s respondents do not think this is the case today.
When will the next global recession start?
Source: BofA ML Global Fund Manager Survey
Some 6 per cent of fund managers think a global recession will start in 2019 but around seven out of 10 say there will not be an economic contraction until the second half of 2020 or later.
And while investors are expecting low growth, their concerns appear to have eased over the past month. A net 5 per cent of fund managers believe global economic growth will weaken over the coming 12 months but this is a big improvement from March – a balance of 25 per cent were expecting weaker global growth in last month’s survey.
But on the whole, managers are downbeat on the direction of travel for the economy and this shows in the assets that they expect to outperform over the coming years.
According to Bank of America Merrill Lynch Global Fund Manager Survey respondents, high-quality stocks are expected to beat low-quality, large-caps will beat small-caps, high dividend stocks will beat low dividend stocks, low volatility will beat high volatility and high-grade bonds will beat high yield.
Considering the specific risks on fund managers’ radars, trade war and an economic slowdown in China were the most commonly cited tail risks. Both of these concerns were highlighted by 20 per cent of the survey’s respondents.
In third place was a new tail risk: monetary policy impotence, chosen by 18 per cent of asset allocators. Other tail risks being watched include US politics, a corporate credit crunch, Brexit and European elections.
Meanwhile, being short European equities is seen as the most crowded trade in the market today, with one-quarter of fund managers holding this view. It was followed by long FAANG+BAT (Facebook, Apple, Amazon, Netflix and Google plus Baidu, Alibaba and Tencent), long US dollar and long US Treasuries.
When it comes to regional equity allocations, the UK remains the least favoured region among Bank of America Merrill Lynch Global Fund Manager Survey participants.
Net % of fund managers overweight UK equities
Source: BofA ML Global Fund Manager Survey
“The allocation to UK equities held flat month-on-month at 28 per cent underweight as another Brexit delay was announced; sentiment has modestly improved from the max bearish 41 per cent underweight in March 2018, but few investors own the region,” BofA ML said.
Global emerging market equities remain the consensus overweight in the survey, with a net 34 per cent of manager overweight the asset class.
The European equities allocation jumped 8 percentage points from last month to net neutral, US equities have moved from being neutral to a small overweight and investors continue to move away from Japanese equities.