It will take more stimulus from central banks to boost investor confidence as fears over recession in the next 12 months remain elevated, according to findings from the latest Bank of America Merrill Lynch Global Fund Manager Survey.
The bank noted that respondents to the closely watched survey remain overweight assets that outperform in a low growth, low rate environment with few signs of a rotation into value assets – those geared to rising interest rates and earnings.
It comes as recession fears rose to their highest level since August 2009, the height of the global financial crisis with a net 38 per cent of respondents expecting a downturn within the next 12 months.
Net per cent saying recession is likely within the next 12 months
Source: BofA Merrill Lynch Global Fund Manager Survey
Indeed, a net 28 per cent of respondents expect global growth to weaken over the coming 12 months.
Although the outlook for global CPI inflation has ticked up more recently, it remains relatively low.
As such, just one in five respondents expect short-term rates to rise over the next 12 months. Indeed, a further 37 per cent of respondents to the survey believe that global fiscal policy is “too restrictive”.
While the US-China trade war remains the top tailwind for investors, topping the charts for 17 of the past 19 surveys, the proportion of respondents who claimed it was their top concern fell by 11 percentage points to a net 40 per cent.
Indeed, 38 per cent of investors believe that the US-China trade war “is the new normal and won’t be resolved”. However, 30 per cent believe that the issue will be settled during 2020 and before the US presidential election.
“We remain contrarian bullish, as this month investors have shown only a modest improvement in risk appetite,” said Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch. “Fiscal stimulus would boost investor optimism.”
However, the recent inversion of the two-year, 10-year US Treasury yield curve was taken by some as a recession indicator, around two-thirds of investors (64 per cent) suggesting that it signalled a recession in the next 12 months.
Nevertheless, investors continue to insure themselves against a sell-off, with around one-third having taken out protection against a sharp fall in equity markets.
The outlook for global earnings remains bearish with 45 per cent expecting profits to deteriorate over the coming 12 months, with the consensus suggesting earnings per share is likely to shrink by 3.1 per cent.
While value should stand to benefit most from a ramp-up in fiscal policy, just 7 per cent of investors believe that the style will outperform growth over the next 12 months.
Net percentage of investors that say global profits will improve in the next 12 months
Source: BofA Merrill Lynch Global Fund Manager Survey
The bank said that it will likely take a fiscal and/or EPS inflection needed for investors to buy value once again, with asset allocators instead adding long positions in growth and defensive sectors despite the recent strong performance of the style.
As such, the global technology sector remains the most favoured among investors a net 26 per cent of whom are overweight. While the global energy sector was the biggest decliner dropping 12 percentage points to a net 17 per cent underweight to a three-year low. (It should be noted that the survey took place before the attacks on Saudi oil fields.)
Allocations to materials were down to three-year low also, while bank exposure was taken down by fund managers.
Utilities allocations increased to a 13 per cent underweight position and the highest allocation since February 2016. Exposure to consumer staples also increased by 3 percentage points to an 8 per cent overweight, the highest since October 2012.
In terms of asset allocation, fund managers sold bonds for equities in September with allocations to fixed income falling by 14 percentage points to 36 per cent net underweight down from an eight-year high.
Equity allocations, broadly, grew by eight percentage points month-on-month to a net 4 per cent underweight. There was also a rise in real estate allocations, which rose by four percentage points to a net 11 per cent overweight, a three-year high.
There was also a rise in commodities exposure, which was up by eight percentage points to a net 5 per cent weight. Cash allocations slipped by two percentage points to a 39 per cent overweight, well above the long-term average.
In terms of currency, a net 41 per cent of respondents said the euro was cheap down to levels not seen since 2002 and there was a pick-up in eurozone equity allocations to a 3 per cent overweight.
Just before the survey UK prime minister Boris Johnson announced he would be suspending parliament until days before the Brexit deadline, limiting the amount of time for pro-remain and anti-‘no deal’ politicians to table legislation blocking a hard Brexit.
The impact increased the likelihood of a ‘no deal’ Brexit and took a toll on UK assets. As such a net 46 per cent of global asset allocators believe sterling is cheap, down 19 percentage points from the prior month and the lowest ever recorded by the fund manager survey.
Net percentage of fund managers who say sterling is overvalued
Source: BofA Merrill Lynch Global Fund Manager Survey
As such, UK equities remains the consensus underweight with a net 30 per cent underweight the market.
US equities returned to the most preferred region status as allocations soared by 15 percentage points with 17 per cent of respondents overweight. It replaced global emerging markets, which was down by two percentage points to an 11 per cent overweight.
Meanwhile, allocation to Japanese equities was up by 11 percentage points and now represents a 1 per cent overweight among fund managers.
The survey saw 182 participants with assets under management of $562bn take part between 6-12 September.