BofA-ML October survey: Fund managers turn decidedly bearish on economy

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

Fund managers have turned decidedly bearish on the outlook for the global economy and for corporate profits, according to the Bank of America-Merrill Lynch’s October survey of fund managers.

A record 85 percent of fund managers surveyed said the global economy was in a late cycle, 11 percentage points above the previous high in December 2007, just as the Global Financial Crisis was beginning, it said.

Around 38 percent of the fund managers expected global economic growth to slow over the next year, down 24 percentage points from August and the worst outlook on the global economy since November 2008, it said.

Profit outlook falls

Profit expectations were also on the downturn, with the percent saying corporate profits would improve sliding 13 percentage points to negative 20 percent, the lowest since May 2016, it said.

Around 35 percent of the respondents said corporate profits won’t improve by 10 percent of more over the next 12 months, down sharply from 35 percent believing they would in the February 2018 survey, BofA-ML said.

In addition, a net 20 percent said they expected global profits would deteriorate over the next year, a two-year low and off January 2018’s high of 39 percent saying they would improve, the survey found.

But while fund managers appear bearish, BofA-ML said it didn’t appear to be bearish enough to signal anything more than a short-term bounce in risk assets ahead.

Fund managers kept their cash levels at 5.1 percent, unchanged from September, compared with an average of 4.5 percent for the past 10 years, it said. The survey uses a cash balance above 4.5 percent as a contrarian buy signal for equities, it said.

Overvalued dollar, undervalued emerging markets

On market views, fund managers believed the U.S. dollar is “very overvalued,” particularly against emerging market currencies, which appear to be at “the cheapest valuation in FMS history,” the survey said.

A net of more than 20 percent of fund managers surveyed said the U.S. dollar was overvalued, a net 51 percent said emerging market currencies were undervalued, the survey published Tuesday said.

Allocations to equities were at a net 22 percent overweight in October, near July’s low of 19 percent overweight, it said.

U.S. equities lose favor

The U.S. equity allocation fell 17 percentage points to 4 percent overweight, reversing much of the climb in August and September, and it ceased to be the most favored region for equities globally, the survey said.

Japanese equity allocations edged down 1 percentage point to a net 18 percent overweight, but rotation out of the U.S. and into emerging markets made it the most favored equity region globally, it said.

The net percentage of investors saying they planned to overweight Japanese equities over the next 12 months was 14 percent, up 8 percentage points on-month, the survey said.

Passive optimism on Japan?

There has been a notable increase in investors confidence in the outlook for Japanese corporate profits (net positive 12 percent think most favorable, up 15 percentage points from last month). The sense of undervaluation in Japan equities remained unchanged (net negative 16 percent say most overvalued,” the survey said.

But the fundamental background behind the increase in Japan allocation may be more passive. An increasing number of investors see the global economy to be in late-cycle and investors are overall bearish,” BofA-ML said. “Trade war, quantitative tightening and China continue to top investor concerns, but the fear of European populism too is rising once again. Japan’s lack of idiosyncratic risk factors outstands.”

It also noted that the dollar/yen was viewed as overvalued, which was favorable for Japanese stocks, BofA-ML said.

Eurozone equity allocations fell 6 percentage points to a net 5 percent overweight, the lowest since December 2016, as allocations to the region have been falling since the fourth quarter of last year, the survey said.

Emerging market equity allocations jumped 15 percentage points to 5 percent overweight after touching the lowest since March 2016 in September, it said.

Bond allocations fell 5 percentage points to 50 percent underweight, but still off the record low of a net 69 percent underweight in February 2018, it said.

Allocations to cash were at a net 36 percent overweight, well above the long-term average, it said.

Real-estate, an interest-rate sensitive sector, lost favor, with the allocations falling 17 percentage points to 10 percent underweight, an eight-year low, the survey found.

The survey was conducted over 5-11 October, with a total of 231 respondents with US$646 billion in assets under management participating overall, with 174 respondents to the global survey and 125 in the regional questions, it said.

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