Fear of recession means that fund managers continue to run a defensive tilt to their portfolios, a respected gauge of investor positioning shows, although there appears to be some signs of a more positive outlook.
The October edition of the Bank of America Merrill Lynch Global Fund Manager Survey – which polled 175 asset allocators with assets under management of $507bn – found that investors worldwide have been putting more into cash over the past month.
Investor cash levels climbed to 5 per cent this month, up from 4.7 per cent in September. While this is “well off” the recent high of 5.7 per cent seen in June, it remains notably higher than the 10-year average of 4.6 per cent.
October also saw fund managers rotate out of cyclical stocks like materials and banks into defensive equities such as healthcare and consumer staples. This skew looks significant, with the overweight to consumer staples now sitting at its largest since May 2013 while investors are the most underweight materials stocks since February 2016.
Change in investor positioning during Oct 2019
Source: BofA Merrill Lynch Global Fund Manager Survey
This bearishness reflects the fact that fund managers remain nervous about the health of the global economy, with 31 per cent of respondents sating they expect a recession in the next year.
While this means two-thirds do not expect a recession, most do believe the economy will weaken over the coming 12 months. Some 9 per cent of managers said growth would get “a lot weaker”, 53 per cent said “a little weaker”, 13 per cent “stay the same”, 23 per cent “a little stronger” and just 1 per cent said “a lot stronger”.
Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, concluded: “Investors remain bearish, but we are seeing signs of green shoots. If concerns about the trade war and Brexit are unrealised, sentiment is likely to improve, validating our bullish tactical views.”
Net % of fund managers overweight equities
Source: BofA Merrill Lynch Global Fund Manager Survey
In more positive findings, the net percentage of fund managers who are overweight equities rebounded 5 percentage points to a 1 per cent overweight, while the bond allocation slipped 2 percentage points to a 38 per cent underweight.
In addition, asset allocators increasingly expect fiscal policy to be used to boost economic growth. A record balance of 57 per cent of the survey’s respondents believe that global fiscal policy is “too restrictive”; as recently as November 2018, a net 33 per cent thought it was “too stimulative”.
Global earnings per share expectations remain bearish as a net 35 per cent of investors said they think profits will deteriorate over the next year, but it should be pointed out that this is a 10 percentage-point improvement on the previous month.
Other “green shoots” noticed by Bank of America Merrill Lynch include a steepening in the yield curve, a one-year high in the number of managers who think companies should increase capital expenditure and the recent outperformance of value over growth.
Hartnett also mentioned that sentiment could improve if the trade war between the US and China is resolved.
The trade war is the issue that fund managers consider to be the biggest tail risk in the market today, cited by 40 per cent of the participants in Bank of America Merrill Lynch’s survey. It is followed by monetary policy impotence (13 per cent), a bond market bubble (13 per cent) and a credit event (11 per cent), while a China slowdown, Brexit and a risk of impeachment for US president Donald Trump were also mentioned as risks.
When asked what the most bullish event for equity markets would be over the next six months, the overwhelming majority of fund managers when for an end to the trade war (around three-quarters of respondents). Much smaller numbers went for German fiscal stimulus, Chinese infrastructure spending, a 50-basis points cut by the Federal Reserve and a resolution to Brexit.
However, there isn’t a strong sense of confidence in how soon the trade war will be resolved – with 43 per cent considering it to be the ‘new normal’ that won’t be resolved.
When do fund managers think the trade war will be resolved
Source: BofA Merrill Lynch Global Fund Manager Survey
Looking forward to where the best returns are expected to come from over the next decade, 30 per cent of investors said emerging markets will outperform in the 2020s. That said, fund managers are only running a 9 per cent overweight to global emerging equities after trimming positions by 2 percentage points this month.
Some 22 per cent think the US will lead over the coming 10 years (building on its significant outperformance over the past decade) while 17 per cent went for China and 15 per cent said Europe.
Despite its recent rally, Japan was the choice of just 7 per cent of asset allocators. The UK came in last place with around 3 per cent of the vote, following several years of being the consensus underweight in the Bank of America Merrill Lynch Global Fund Manager Survey.