More than one-third of asset allocators have taken out protection against a sharp fall in equity markets over the next three months, according to the closely watched Bank of America Merrill Lynch Global Fund Manager Survey.
Concerns over a potential market fall have been raised in recent weeks as the US-China trade war has once again reared its head.
The most recent edition of the survey showed that trade war remains on top of fund managers’ list of biggest tail risks, rising by 17 percentage points month-on-month.
May’s survey found that trade war was the biggest risk for 37 per cent of the 195 participating fund managers (with $588bn in assets under management).
As such, current levels of protection represent the highest levels ever recorded on an absolute and a net basis, as the below chart shows.
Source: Bank of America Global Fund Manager Survey
Despite fund managers taking out greater levels of protection, few are positioned for such a sell-off in markets, according to the bank.
Over the past month, allocators became more risk-on by reducing underweights in eurozone and banks and adding to tech stocks. Managers also cut their bond proxy exposure, suggesting that they are not positioned for a full escalation of a US-China trade war.
“Fund manager survey investors are well-hedged but not positioned for a breakdown in trade talks” said Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch.
In addition, a net 43 per cent of managers remain net long equities, a stance that remain unchanged from April and was well off March lows, according to the bank.
However, that stance is starting to show signs of strain with equity allocations dropping six percentage points over the month to a net 11 per cent overweight.
Indeed, the bank’s Bull & Bear Indicator remains unchanged at a level of 5.1 – signalling a neutral equities stance (a figure below 2.0 is a buy signal, above 8.0 a sell signal).
“Investors see little reason to ‘buy in May’ unless the three ‘Cs’ – credit, the consumer and China – quickly surprise to the upside,” said Hartnett.
Fears about the credit cycle remain well-entrenched, with 41 per cent saying that corporate balance sheets are overlevered although this has fallen of record highs in December and January. There was also a further 3 percentage point rise in the proportion of respondents that want companies to delever, rising to 46 per cent.
In the fixed income space, bond allocations remain at a seven-year high with a net 34 per cent underweight as dovish central banks and risk-off sentiment drives interest rates lower.
The survey revealed that 70 per cent of respondents expect interest rates to remain rangebound at between 2-3 per cent over the next 12 months and few therefore are positioned for a sharp rally in rates.
Just 4 per cent expect yields to return below 2 per cent and it would take a fall of 22 per cent for the S&P 500 from May highs before the Fed stepped in to begin cutting rates.
Despite taking on more protection, fund managers remain bullish about the prospects for the global economy and corporate sector, with two-thirds of respondents saying a recession is unlikely until at least the second half of 2020 or later.
Source Bank of America Global Fund Manager Survey
Just a net 5 per cent of asset allocators expect global growth to weaken over the coming 12 months compared with a net 60 per cent in January.
On a corporate level, global profit expectations have rebounded to a nine-month high after rising 15 percentage points from last month. Just 1 per cent of respondents thought that profits would deteriorate over the coming year.
In currencies, the consensus opinion remains that the US dollar is overvalued. However, respondents say that the euro is cheap and in line with May 2017 levels, which itself was a 17-year low.
The UK remains the least favoured region among investors although allocations remained unchanged for the third month running at a net 28 per cent underweight.
Further Brexit delays have contributed to a modest improvement in sentiment from a 41 per cent underweight in March 2018.
Source Bank of America Global Fund Manager Survey
Elsewhere, allocations to US equities have been reduced to a net 2 per cent underweight after hitting negative territory for the first time in nine months during February.
Sentiment towards Japanese equities is more positive, with allocations rising four percentage points to a net neutral position, while fund managers were bullish on eurozone equities which rose by nine percentage points to a net 9 per cent overweight position.
Allocations to emerging market equities were unchanged at 34 per cent overweight and remains the most preferred region among survey respondents.
On a sector basis there was big lurch down in utilities allocation, falling by 10 percentage points lower to a 27 per cent net underweight.
Allocations to global industrials and materials fell slightly while healthcare exposure dropped for the third consecutive month, although it remains the second-most favoured sector at a net 17 per cent overweight.
Despite being the most crowded trade for fund managers, global technology remains the most favoured sector with fund managers at a net 34 per cent overweight position: a six percentage point rise month-on-month and a 14-month high.