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How fund managers are positioned heading into 2018

22 December 2017

The latest Bank of America Merrill Lynch survey shows managers are cooling on UK, emerging market and Japanese equities.

By Jonathan Jones,

Reporter, FE Trustnet

Sentiment towards the UK among European managers is at a record low but Brexit doesn’t even crack the top five global risks, according to Bank of America Merrill Lynch (BofA ML) research.

The BofA ML European Fund Manager Survey for December showed that the UK continues to be deeply out of consensus among European managers.

Net allocation to the market fell again this month to a record low, with 39 per cent of fund managers saying it is the region they would most like to underweight.


Source: BofA ML Global Fund Manager Survey

This is despite UK market holding up surprisingly well since the EU referendum last year, with the FTSE All Share returning 25.19 per cent since the vote.

Helal Miah, investment research analyst at The Share Centre said: “Immediately after Brexit, consumer confidence remained surprisingly upbeat, but it seems that was on the back of spending being put on low interest credit.

“However, as wage growth has slipped further behind the Brexit induced inflation spike, it is clearly evident that consumers are feeling the pinch.”

As such, the International Monetary Fund (IMF) has now downgraded its growth outlook for this year from 1.6 per cent to 1.5 per cent.

“The IMF and Lagarde are pointing towards the uncertainty of Brexit and the impact this is having on business confidence that are holding back on investments,” he said.

“Some may make the argument that there has been a positive impact for manufacturers as a result of the fall in sterling. This is all well and good and we hope that that more benefits could emerge of time, but it’s clear the overall impact has been negative and could have been worse were it not for the pickup in activity amongst our trading partners.”

The BofA ML survey results show how this has seeped into fund managers’ thinking as well, while earlier this month Hargreaves Lansdown also noted that investor confidence among its users had sunk to record lows.

However, while investors in Europe are concerned for the UK, globally there are bigger issues than Brexit.

The biggest potential risk is that the Federal Reserve makes a policy mistake as it continues its interest rate hiking cycle and begins to unwind the extraordinary quantitative easing program it has embarked on since the financial crisis.

Invesco Perpetual chief investment officer John Greenwood said: “The only real risk is the possibility that the Fed and other central banks could make a mistake and tighten too much during monetary policy normalisation.

“If they overdo the tightening, there is a real risk of a slowdown in 2018-2019 and a continuation of below-target inflation rates across many major economies. This is not my base case, but investors need to be mindful of this possibility.”

It is the top risk among fund managers, as the below chart shows, though there are some new entrants in December with a crash in the bond market and concerns over Chinese debt also coming to the fore.

Fund managers’ biggest risks to markets in 2018

Source: BofA ML Global Fund Manager Survey

Peter Harrison, chief executive of Schroders, said: “In China, valuations look stretched, while growth may slow, dragged by debt reduction, particularly in the property market, and rising raw material costs, which may squeeze margins. However, domestic consumption and investment should hold firm, with selected sectors growing earnings.”

However, Rathbones’ multi-asset head David Coombs argued the “phobia” around investing in China is misplaced.

“Yes, it has problems – debt and disintegrating productivity growth are two of the largest – but it’s one of the major drivers of the global economy in the 21st century,” he said.

“Its government has an iron control on all parts of the economy giving it many more levers to pull and twist to deal with challenges. It’s going to be an exciting journey over the next decade or more.”

Despite these concerns, fund managers have been taking on more risk with cash levels falling over the second half of the year, even though a net 45 per cent believe that equities are overvalued – a record high.

Although expectations that the ‘Goldilocks’ environment of high growth and low inflation fell back this month, 54 per cent of respondents still thought the conditions were probable for 2018.

The most popular trade of the last month has been the cryptocurrency Bitcoin, which has made its second appearance as the most crowded trade of the month in four months.

From an asset allocation perspective, 83 per cent of managers believe bonds are overvalued – near the all-time high of 85 per cent recorded in October – with 59 per cent of managers taking an underweight position.

Allocation to equities slipped to a net 48 per cent overweight – though this is still high at 0.8 standard deviations above its long-term average.

Within equities, managers moved slightly less underweight the US with a rise to net 15 per cent – 1 percentage point higher than last month.

The biggest fall in sentiment was towards emerging markets, where managers moved from a 43 per cent overweight in November to 34 per cent – reflecting, in part, the increased risk of Chinese debt described above.

Net asset allocation to emerging markets


Source: BofA ML Global Fund Manager Survey

This comes despite a growing preference for emerging markets among investors, as they are cheaper on a relative basis to the US and have performed strongly in 2017.

There was also a fall in preference of Japanese equities, which moved from a two-year high of 32 per cent with overweight allocations in November to 24 per cent in December.

The BofA Merril Lynch global fund manager study was conducted between 4 and 8 November, and included 203 fund managers running a total of $553bn.

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