Fund managers appear to have bought into last month’s dip in markets after reducing cash levels in favour of equities, although they are more pessimistic on the 2019 outlook, according to the most recent edition of the Bank of America Merrill Lynch Global Fund Manager Survey.
The latest survey findings revealed that average cash levels dropped sharply from 5.1 per cent in October to 4.7 per cent this month, just above the neutral 10-year average level of 4.5 per cent.
Markets sold off in October as sentiment towards equities weakened following comments by Federal Reserve chairman Jerome Powell suggesting a faster rate-hiking cycle than some had anticipated.
Source: BofA ML Global Fund Manager Survey
The S&P 500 fell by 4.95 per cent – in sterling terms – while the MSCI AC World index dropped by 5.59 per cent. Closer to home, the FTSE All Share index lost 5.19 per cent and the embattled MSCI Emerging Markets index shed 6.83 per cent.
Fund managers seemed to grasp the opportunity to add further equity exposure as allocations rose to a net 31 per cent overweight.
Among the most popular equity moves in November were towards US, emerging market and healthcare stocks.
Indeed, having dropped in October, exposure to US equities climbed 10 percentage points to a 14 per cent overweight this month, making it the most-favoured equity region globally and rising above emerging markets.
Fund managers’ exposure to emerging market equities increased by eight percentage points to a 13 per cent overweight.
Meanwhile, allocations to the healthcare sector rose by four percentage points to a 28 per cent overweight position and the most overweight sector among investors.
Another big move by investors was in positioning in real estate investment trusts – listed property investment companies known as REITS – as allocations to real estate jumped by 10 percentage points to net neutral positioning after hitting an eight-year low in October.
However, not all parts of the equity market were popular with investors, with some big underweight month-on-month moves.
One of the biggest moves over the month was a decrease in technology sector exposure, which has collapsed to its lowest level since February 2009 by falling to a net overweight of 18 per cent.
The sector was one of the hardest hit in October with the technology-orientated Nasdaq Composite index down by 7.29 per cent in sterling terms, falling harder than the blue-chip S&P 500 index.
Indeed, the long FAANG+BAT – Facebook, Amazon.com, Apple, Netflix & Google + Baidu, Alibaba & Tencent – trade remained the most crowded trade for the 10th consecutive month.
Although the bank said there were “ominously no signs of investor rotation from tech to value” as investors favoured defensives such as healthcare and utilities over banks, small-caps and industrials.
Yet, there were other big underweight moves this month, with the most unpopular region falling out of favour once again in November.
Having become more bullish in recent months, allocators increased their underweight position on UK equities in October, falling to 27 per cent as the Brexit deadline draws closer and stokes renewed uncertainty.
Source: BofA ML Global Fund Manager Survey
Along with UK exposure, fund managers dumped Japanese equities. They fell by nine percentage points to a 9 per cent overweight position.
While not a big move, there was further downward movement in sentiment towards eurozone equities as exposure – which has been falling since the fourth quarter of 2017 – dropped to just 1 per cent of fund managers overweight, the lowest level since December 2016.
Although cash levels fell in November the bank does not believe "the big low" in markets has been triggered and is unlikely to emerge before the second quarter of 2019.
“We remain bearish, as investor positioning does not yet signal ‘the big low’ in asset markets,” said Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch.
Indeed, investors believe there is still room for the S&P 500 to rise peaking at 3,056 or 12 per cent higher than levels at the time of the survey.
Similarly, asset allocators said there will be no rotation to bonds from equities until the yield on the US 10-year Treasury reaches 3.7 per cent. It currently stands at around 3.2 per cent.
Source: BofA ML Global Fund Manager Survey
However, one in three investors believe that US stocks have already peaked.
Outlooks for next year are also becoming bearish, with 44 per cent of respondents expecting global growth to decelerate during the next 12 months, “the worst outlook on the global economy since November 2008”, the bank noted.
Additionally, 54 per cent believe Chinese growth – the engine of the global economy for much of the post-financial crisis period – is likely to slow down next year.
Despite an increasingly bearish outlook, however, just 11 per cent of fund managers expect a global economic recession.
The survey further revealed that 45 per cent of respondents believe the best-performing assets of next year will be non-US equities compared with just 17 per cent for the S&P 500.
The worst performing assets are likely to be corporate bonds (cited by 25 per cent) and government paper (24 per cent).
For the sixth month-running, the biggest global tail risk for markets is a trade war, although quantitative tightening has begun to figure more prominently in the survey as a concern for allocators.
Other worries abound, as managers revealed concerns over corporate leverage, which the bank said suggests underperformance for equities ahead.
Respondents also remain gloomy about the outlook for global profits, with a net 29 per cent believing they will deteriorate in the coming 12 months, a six-year low. Additionally, 47 per cent of allocators believe corporate margins will deteriorate in the next 12 months.
The survey polled 174 fund managers across the globe with total assets under management of $513bn, between 2 and 8 November.