Fund managers across the world have scaled back their allocation to risk assets as concerns mounted that China and the US would break into a full-blown trade war, a closely watched survey reveals. 
The BofA Merrill Lynch Global Fund Manager Survey for July shows that asset allocators significantly lowered their equity exposure at the start of the month.
In addition, the poll – which covered 178 participants with total assets under management of $542bn between 6 and 12 July – found that fund managers also have a negative view on global growth and how companies will perform over the coming 12 months.
Michael Hartnett, chief investment strategist at BofA Merrill Lynch, said: “Investor sentiment is bearish this month, with survey respondents eyeing the risks from a possible trade war. Equity allocation has fallen notably while growth and profit expectations have slumped.”
In the following article, we highlight five charts from the BofA Merrill Lynch Global Fund Manager Survey that reveal just how depressed sentiment became this month.
Fund managers drop equities
In July, global fund managers said their allocation to equities stood at a net 19 per cent overweight – a fall of 14 percentage points on the previous month.
This is the lowest allocation to stocks since November 2016 – when investors were risk-off ahead of the US presidential election – and 0.4 standard deviations below the long-term historical average.
Net % of asset allocators that are overweight equities
Source: BofA Merrill Lynch Global Fund Manager Survey
At the same time, asset allocators made a slight move towards fixed income with their weighting to bonds lifting by 1 percentage point.
The allocation to bonds is still a net 48 per cent underweight but it is now at its highest since November 2016 and well above the record low of a net 69 per cent underweight set in February this year.
Trade wars are worrying investors
The major reason behind fund managers’ risk-off attitude was the heightened risk of global trade war. Some 60 per cent of investors polled in the research cited this as the biggest tail risk affecting them today.
Trade wars have been on investors’ minds for much of the recent past after US president Donald Trump unveiled a series of tariffs on imports as part of his ‘America First’ programme.
What do you consider the biggest tail risk?
Source: BofA Merrill Lynch Global Fund Manager Survey
On 6 July, the Trump administration placed tariffs on $34bn worth of Chinese goods, leading China to hit back with retaliatory tariffs on the US; Trump has since threatened an additional $200bn (£150bn) worth of tariffs on China.
The second-most cited tail risk was a hawkish policy mistake by the Federal Reserve or the European Central Bank but only 19 per cent of respondents opted for this; a euro or emerging market debt crisis was in third place but worried just 6 per cent of fund managers.
Not confident on the global economy
This month witnessed a big fall in fund managers’ confidence on the global economy for the coming year – the BofA Merrill Lynch Global Fund Manager Survey found that more managers are forecasting slower growth rather than faster.
Asset allocators’ expectations for faster global growth have fallen from a positive balance of 12 per cent in June to a negative balance of 11 per cent this month. This is below BofA Merrill Lynch’s ‘bust threshold’ and is the lowest reading on this measure since February 2016.
How will the global real economy develop over the next 12 months?
Source: BofA Merrill Lynch Global Fund Manager Survey
This does not lead to a positive picture for the BofA Merrill Lynch’s Global FMS Macro Indicator, which is based on changes in fund managers’ inflation expectations, capex demand, risk appetite, cyclical vs defensive sector positioning and equity vs bond positioning.
The indicator fell for the eighth straight month and is in negative territory, with conditions now at their lowest in almost two years. BofA Merrill Lynch said the signal is ‘neutral’ and suggested that opportune conditions for buying risk assets will not be reached until cash levels start to decline.
Profit growth not expected
Another bearish sign in the survey is the fact that fund managers are not forecasting an improvement in corporate profits over the next 12 months.
A net 9 per cent of the poll’s respondents think that global profits will not improve in the coming year. This is a massive fall from January 2018, when a balance of 53 per cent were expecting profits to rise, and is the lowest reading since February 2016.
Profit expectations
Source: BofA Merrill Lynch Global Fund Manager Survey
Furthermore, a net 11 per cent of managers believe that corporate earnings will not improve by 10 per cent or more, which is a significant swing from 35 per cent thinking they would in February 18.
When asked about their concerns for companies, a growing number of allocators want them to improve their balance sheets – the number requesting this has risen to an eight-year high. In contrast, demand for companies to increase their capex has fallen.
Long FAANG+BAT remains the most crowded trade
The tech-focused FAANG+BAT stocks of Facebook, Apple, Amazon, Netflix and Google plus emerging market companies Baidu, Alibaba and Tencent have had a strong run in recent years but are now seen as being over-popular.
Some 53 per cent of respondents to the latest BofA Merrill Lynch Global Fund Manager Survey highlighted FAANG+BAT as the market’s most crowded trade at the moment. This is the sixth straight month they have picked this as the most crowded trade.
What do you think is currently the most crowded trade?
Source: BofA Merrill Lynch Global Fund Manager Survey
Being short emerging market equities was seen as the second most crowded trade after being cited by 12 per cent of fund managers. The survey showed that allocators now have a net 1 per cent underweight to emerging markets following a 23 percentage point fall – the largest monthly drop for the asset class in two years – during July.
Long oil came in third place with 10 per cent of vote. A balance of 25 per cent of fund managers now consider oil to be overvalued. Oil has sold off in recent days (after the survey was carried out) but rallied over the opening half of 2018; Brent crude is currently priced at $71.56 a barrel.