Portfolio managers have moved to their most bearish positioning since the global financial crisis against a backdrop of deteriorating relations between the US and China and fears of a recession, according to the highly regarded Bank of America Global Fund Manager Survey.
Concerns over a trade war have soared month-on-month with 56 per cent of managers surveyed naming it as the top tail risk to the market, up 19 percentage points from last month. Trade war has topped the list of tail risks in 14 of the past 16 months.
Meanwhile, growth forecasts have slumped with a net 50 per cent of respondents expecting the global economy to weaken over the next year, consistent with 2000-2001 and 2008-2009 recession levels. In addition, a record 87 per cent of respondents now believe the economy in late-cycle.
As such, fund managers moved to highly bearish positions within their portfolios.
Average cash balances among survey respondents soared from 4.6 per cent in each of the past three months to 5.6 per cent in July, the biggest jump in cash since the debt ceiling crisis of 2011, when US legislators raised objections over the automatic increase in borrowing levels.
Source: BofA Merrill Lynch Global Fund Manager Survey
Allocations to global equities slumped by 32 percentage points to a net 21 per cent underweight – the lowest allocation since March 2009.
Bond allocations soared by 12 percentage points to a net 22 per cent underweight, which the bank said was the highest level since September 2011. Meanwhile, allocations to real estate rose to a 10 per cent overweight position, a three-year high.
The bank said fund managers’ asset allocations – moving away equities and towards bonds – now implies recessionary conditions, with the equity-bond allocation spread now down to 1 per cent, the tightest level since May 2009.
In addition, the survey – which was conducted between 7 and 13 June with 179 fund managers overseeing $528bn in assets taking part – found that portfolios have rotated from cyclical plays such as banks and technology into defensive areas like consumer staples and utilities.
“Fund manager survey investors have not been this bearish since the global financial crisis, with pessimism driven by trade war and recession concerns” said Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch.
The survey further noted that the investors have moved into assets that outperform when interest rates and earnings both fall while going more underweight those that are positively corelated to rising growth and inflation.
Indeed, around of one-third of respondents to the survey expect short-term interest rates to fall over the next 12 months. Nevertheless, managers have a low strike price for the Federal Reserve to cut rates – despite recent speculation of more imminent action – at a weighted average level of 2,430 compared with current levels of around 2,900.
On a corporate level, fund managers have also taken a more pessimistic outlook on profit expectations with a net 41 per cent of investors saying they expect earnings per share to deteriorate in the next year, a 40-percentage point decline and the second biggest one-month collapse in the 23-year history of the survey
Fears also remain among respondents about corporate indebtedness with 42 per cent claiming companies remain overleveraged.
Source: BofA Merrill Lynch Global Fund Manager Survey
As such, allocators have rotated from cyclical plays such as banks and technology into defensive areas, including consumer staples and utilities.
Allocations to global banks fell 20 percentage points to a net 13 per cent underweight in July, the biggest underweight to the sector since February 2016.
Conversely, exposure to utilities stocks soared by 13 percentage points month-on-month to a net 14 per cent underweight, a three-year high. Consumer staples also benefited from a move to a more bearish stance as allocations rose to their highest levels since May 2013 at a net 5 per cent overweight.
The most popular sector with investors is healthcare, which rose for the first time in four months to a 23 per cent overweight, making it the consensus overweight.
On a regional level, investors have moved away from eurozone equites falling by 17 percentage points to an 8 per cent underweight. This just below the seven-year low of an 11 per cent underweight recorded in January 2019.
While fund managers have become more bearish they remain positive on the US equity market, where allocations inched up to a 5 per cent overweight and made it the second most popular region among investors.
The most preferred region for equities was global emerging markets, which despite a 13 percentage point month-on-month fall remains the consensus overweight among allocators at 21 per cent.
Source: BofA Merrill Lynch Global Fund Manager Survey
The UK remains the consensus underweight among fund managers. Although there was a slight month-on-month improvement, it is a 24 per cent underweight among asset allocators as Brexit remains unresolved and the Conservative party appoints a new leader.
While the UK remains the most underweighted regions, among European fund manager respondents Italy remains the most disliked region with a net 42 per cent saying they would underweight the country over the next 12 months, a sharp deterioration in sentiment since May.