Recession fears among fund managers hit an eight-year high in August amid continued concerns over trade wars and restrictive fiscal policy, according to the closely watched BofA Merrill Lynch Global Fund Manager Survey.
The survey – conducted between 2-8 August with 171 managers overseeing $455bn in assets under management – found fund managers have become more cautious in their positioning over concerns for the global economy.
The proportion of respondents who believe that a technical recession (two consecutive quarters of negative real GDP growth) is likely in the next 12 months reached its highest level since 2011.
Source: BofA ML Global Fund Manager Survey
A net 34 per cent of survey respondents believe a recession could happen within the next year – the highest response since October 2011. However, it should be noted that 64 per cent of asset allocators think it unlikely.
Nevertheless, it is in line with the bank’s which believes there is a one-in-three chance of recession. The bank’s analysts noted that there had been a broad-based weakening in data signalling an increased likelihood of a recession and the further flattening of the yield curve.
Indeed, a net 25 per cent of asset allocators see the current fiscal policy as too restrictive while just 11 per cent thought it was too stimulative, the most hawkish stance since November 2016.
Given the the Federal Reserve cut rates in July, it was little surprise to see that a net 43 per cent of respondents expect lower short-term rates over the next 12 months, which the bank said was the most bullish view on bonds since November 2008.
“Investors are the most bullish on rates since 2008 as trade war concerns send recession risk to an eight-year high,” said Michael Hartnett, chief investment strategist at the bank. “With global policy stimuli at a 2.5-year low, the onus is on the Fed, European Central Bank and People’s Bank of China to restore animal spirits.”
Trade war topped the list of biggest tail risk for markets in the latest edition of the survey, rising by 15 percentage points month-on-month as US president Donald Trump again pressed the issue. It has now topped the charts in 16 of the past 18 surveys.
While concerns over corporate leverage is no new trend in the survey, levels have now hit record levels, with a net 50 per cent of fund managers voicing concerns.
Accordingly, a net 46 per cent of respondents would like companies to use cash flow to improve balance sheets, while just over one-third (a net 36 per cent) would like companies to increase capital expenditure, and 13 per cent would like them to return cash to shareholders via dividends of buybacks.
This might prove difficult, however, as It comes at a time when fund managers expect a slowdown in earnings growth with investors expecting less than 10 per cent earnings per share growth over the coming 12 months.
Corporate indebtedness is certainly a concern as investors think corporate bonds are the most vulnerable to a central bank-induced bubble, narrowly ahead of government bonds and US equities.
Given the backdrop, asset allocators moved overweight to assets that outperform when interest rates and earnings fall in August and underweight those positively correlated to rising growth and inflation the bank found.
Source: BofA ML Global Fund Manager Survey
As such, both cash and real estate saw increased allocations during August while equities fell off.
Cash allocations were held at 41 per cent overweight considerably higher than its long-term average, while real estate allocations moved 9 percentage points higher to a 7 per cent overweight.
Bond allocations climbed by 12 percentage points month-on-month to a net 22 per cent underweight, the highest exposure since September 2011.
Meanwhile, global equities allocation fell by 22 percentage points in August to a net 12 per cent underweight.
While cash allocations remain high, the 5.1 per cent level remains well above the 10-year average of 4.6 per cent and has remained firmly in buy territory for the past 18 months. (When cash rises above 4.5 per cent, a contrarian buy signal is generated, when it falls below 3.5 per cent a contrarian sell signal is issued.)
From a regional perspective, emerging markets remained the most favoured region for equities although allocations here fell by 11 percentage points to a net 12 per cent overweight.
This wasn’t the largest drop-off in sentiment, however, as the allocations to eurozone equities dropped by 12 percentage points to a 3 per cent underweight.
While a net 15 per cent of investors said they would like to be overweight US equities over the next 12 months, 78 per cent noted that the region is overvalued.
However, this was not necessarily reflected in allocations to US equities, which fell by 7 percentage points month-on-month to a net 2 per cent overweight.
There was also a fall in allocation to Japanese equities which dropped 5 percentage points to a net 9 per cent underweight.
The least favoured, however, remains the UK which saw a fall of 6 percentage points in allocations down to a net 29 per cent underweight as new prime minister Boris Johnson continues to prepare the country for a ‘no deal’ Brexit.
Indeed, the European edition of the survey – which polled 115 participants overseeing $211bn in assets – revealed that the most likely Brexit leaving date was 31 October, followed by November/December or the first half of 2020 (21 per cent each). Just 3 per cent of participants chose ‘never’.
Source: BofA ML Global Fund Manager Survey
In terms of style just a net 5 per cent of global investors expect value to underperform growth over the next 12 months, which the bank said wat the lowest level since the global financial crisis and reflected extremely bearish inflation and growth expectations.
As such investors remain overweight growth versus cyclical value stocks adding to technology exposure – the most favoured – and slashing allocation to industrials in August.