BofA-ML survey: Fund managers look bearish equities, but still eye US stocks

U.S. one-dollar and five-dollar currency notes; taken September 2018.U.S. one-dollar and five-dollar currency notes; taken September 2018.

Fund managers are cutting their allocations to equities in general, but are piling into U.S. stocks in September, according to the Bank of America-Merrill Lynch survey.

The allocation to U.S. equities was the No.1 long trade, with the biggest overweight since January of 2015 and the top equity region for the first time in five years, the survey found. The allocation to U.S. equities rose 2 percentage points to 21 percent overweight, it said.

The U.S. is the most favored equity region globally for the second month running as investors buy growth over value both regionally and sectorally,” it said. The percentage of fund managers saying the U.S. profit outlook was the most favorabel was at 69 percent, a 17-year high, it said. 

That came as fund managers’ allocations to equities slid 11 percentage points to a net 22 percent overweight, close to July’s 18-month low, the survey found.

Turning bearish

Outside of optimism for U.S. earnings, fund managers appeared more bearish, with 16 percent of respondents saying they don’t think corporate earnings will improve by 10 percent of more over the next 12 months, marking a significant swing from the 35 percent who thought they would in February, it said.

Indeed, a net 7 percent expected global profits would deteriorate over the next year, swinging from January’s 39 percent saying profits would improve, it said.

Overall, managers appeared bearish, raising cash levels by 0.1 percentage point to 5.1 percent, compared with an average of 4.5 percent for the past 10 years, reaching an 18-month high, it said.

Global growth was expected to decelerate over the next 12 months by 24 percent of managers, compared with a negative 7 percent in August, making this the worst outlook for the global economy since December 2011, it found.

Cutting EM allocations

Fund managers cut their eurozone equity allocations by 6 percentage pints to 11 percent overweight, an 18-month low, the survey found.

Emerging-market equity allocations fell 9 percentage points to 10 percent underweight, the lowest since March 2016, and a large reversal from 43 percent overweight in April 2018, when it was the most favored region among managers, the survey found.

Allocations to bonds increased by 9 percentage points to a net 45 percent underweight, the seventh rise in the past eight months, off the record low of net 69 percent underweight touched in February, it said.

Real-estate allocations rose 5 percentage points to 7 percent overweight in September, a two-year high, it said. But allocations to commodities dropped 12 percentage points to 9 percent underweight, a one-year low, which comes after six months of managers being overweight,  it said.

Trade war less frightening?

The trade-war boogieman appeared less frightening to many managers.

Trade war was named as the biggest tail risk by 43 percent of managers in the September survey, down from 57 percent in August, it said. But 18 percent named a slowdown in China’s economy as a tail risk, up from around 15 percent in August, while quantitative tightening was the third biggest risk named, by 15 percent of respondents, it said.


The percentage of fund managers who think gold is undervalued hit a record 17-year low of 19 percent, down 8 percentage points from August, the survey found.

But a net 43 percent of managers said global emerging markets currencies are undervalued, making for the cheapest valuation since 2013, it said.

The survey period ran from 7 to 13 September, with a total 244 managers with US$742 billion in assets under management participating, it said.

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