Global growth expectations have slumped to their lowest level since the height of the global financial crisis as managers have become more pessimistic about the economic outlook, according to the most recent edition of the Bank of America Merrill Lynch Global Fund Manager Survey.
According to the closely-watched survey, opinions have continued to hardened as 38 per cent of investors expect global growth to decelerate during the next 12 months.
The latest reading represents the worst outlook on the global economy since November 2008, when the International Monetary Fund revised down growth expectations sharply.
Source: BofA ML Global Fund Manager Survey
Furthermore, a record 85 per cent of asset allocators believe the global economy is in the late stage of the cycle, 11 per cent above prior highs in December 2007.
While the US economy has continued to rally in 2018 spurred in part by president Donald Trump’s tax cuts, other global economies have been left behind.
Indeed, fund managers’ opinions on the different outlooks for the global and US economies are also starting to diverge.
The survey revealed that the expectations of stronger US and global economies during the next 12 months had moved to their widest level since October 2007.
Increased bearishness has been attributed to comments by the Federal Reserve of a faster rate hiking cycle, which has this month sparked a market sell-off.
However, while fund managers have turned increasingly bearish on the prospects for the global economy there have been few signs that managers are taking action.
“Investors are bearish on global growth, but not bearish enough to signal anything but a short-term bounce in risk assets,” said Michael Hartnett, chief investment strategist at the bank.
Indeed, cash levels remain unchanged while the BofAML according to the Fund Manager Survey Cash Rule, which remains unchanged at 5.1 per cent and firmly in buy territory for the past eight months.
Managers continue to worry about signs of weakness in corporate balance sheets, where leverage remains a concern and points to underperformance of equities relative to bonds ahead, according to the survey.
Yet, there are few signs that allocators are prepared to rotate from equities to bonds, with 3.7 per cent the magic number for US 10-year Treasury yields.
Source: BofA ML Global Fund Manager Survey
Fears over a trade war remain at the forefront of fund managers’ minds, topping the survey’s biggest tail risk for the fifth consecutive month, although managers are starting to become more concerned by quantitative tightening.
Another potential risk is the upcoming US mid-term elections, which could have significant consequences for Republican president Donald Trump.
If the Democrats were to win both chambers of Congress, the majority of respondents believe both the S&P 500 and Treasury yields would fall.
On a regional basis, allocators remain more confident on the outlook for US corporate profits, while the outlook for Japanese earnings has also improved over the past month.
However, 35 per cent of respondents do not believe corporate earnings will improve by 10 per cent or more over the next 12 months.
Indeed, a further 20 per cent believe global profits will deteriorate over the next year, a two-year low, according to the bank.
Despite a more cautious outlook for equities, allocation to the asset class remains at a 22 per cent overweight. Moreover, bond allocations remain low, representing a 50 per cent underweight for allocators.
Within equities there was some rotation from growth and cyclicals into resources stocks, such as energy and materials.
Allocations to energy increased by 13 percentage points to a 16 per cent overweight close to six-year highs witnessed earlier this year. Materials also saw an improvement in allocation “reflecting on expectations of peak US dollar and rotation into inflation assets”, although it remains a consensus underweight position.
As the recent sell-off has centred around technology stocks that have led markets through much of the post-crisis bull run, allocators also trimmed their exposure here.
Allocations dropped by six percentage points to a 25 per cent overweight position. It does remain the most popular sector among investors, however, despite FAANG+BATs – Facebook, Amazon.com, Apple, Netflix and Google-parent Alphabet + Baidu, Alibaba & Tencent – remaining one of the most crowded trades.
Having been the most favoured equity region globally during the summer, allocation to US equities fell by 17 percentage points to a 4 per cent overweight.
Taking the most-favoured equity region crown was Japan where net allocation sits at an 18 per cent overweight following a rotation out of the US and emerging markets.
Emerging markets remains popular with 5 per cent of respondents saying they are overweight.
There was better news for UK equities where a 5 percentage point improvement in sentiment was recorded, with just 19 per cent of allocators underweight the domestic market.
Indeed, UK-listed equities are thought to have benefited from its high exposure to the commodities sector as well as hopes of a Brexit deal being concluded with six months of the Article 50 notice period to go.
Source: BofA ML Global Fund Manager Survey
The findings also revealed that there had been continued cutting of allocation to eurozone equities, which started in the final quarter of 2017. A further decline of six percentage points took exposure to just 5 per cent overweighted, the lowest level since December 2016.
The survey polled 174 fund managers across the globe with total assets under management of $518bn, between 5 and 11 October.