Fund managers are bearish, but not too bearish, Bank of America-ML December survey finds

Sculpture by Jimmie Durham, titled ‘Still Life with Spirit and Xitle,’ made of car, volcanic stone and acrylic paint at the Hirshorn museum in Washington, DC. Photo taken July 2018.Sculpture by Jimmie Durham, titled ‘Still Life with Spirit and Xitle,’ made of car, volcanic stone and acrylic paint at the Hirshorn museum in Washington, DC.

Global fund managers are bearish, but not too bearish, going long on cash and defensives, but still not expecting a full-blown recession in 2019, the Bank of America-Merrill Lynch fund managers survey for December, released late on Tuesday U.S. time, showed.

“Investors are close to extreme bearishness,” said Michael Hartnett, chief investment strategist at BoFA-ML, in a statement. “All eyes are on the Fed this week, and a dovish message could equal a bear market bounce.”

Just 9 percent of the fund managers surveyed predicted a recession next year, down from 11 percent projecting one in November, but a whopping 53 percent expected gross domestic product (GDP) growth to weaken in the next 12 months, up from 44 percent in November, marking the worst outlook on the global economy since October 2008, during the Global Financial Crisis, the survey found.

A net 47 percent expect global profits to deteriorate over the next 12 months, the worst outlook since December 2008, marking a major reversal from January 2018, when 39 percent expected profits to improve, the survey showed.

Allocations to bonds jumped 23 percentage points to a net 35 percent underweight, marking the highest bond allocation since the Brexit vote in June 2016, it said. But fund managers also said they don’t expect a “full-scale rotation” out of equities and into bonds until the U.S. 10-year Treasury note yield rises to around 3.6 percent, on average, the survey found.

The 10-year U.S. Treasury note yield was at 2.812 percent at 9:18 A.M. SGT.

Cash allocations rose 4 percentage points to a net 35 percent overweight, above the long-term average of 20 percent overweight, it said.

Allocations to equities fell 15 percentage points to a net 16 percent overweight, coming in below long-term averages, the survey found.

For U.S. equities, allocations fell 8 percentage points to 6 percent overweight, but remained above the long term average, it said.

Allocations to eurozone equities declined 8 percentage points to a net underweight for the first time since December 2016, but those to U.K. equities “crashed” 12 percentage points to 39 percent underweight, the second-largest underweight the survey has recorded, as Brexit deadlines creep closer, the survey found.

Allocations to emerging markets rose 5 percentage points to 18 percent overweight, making it once again the top regional pick among fund managers, the survey found.

But defensive sectors were more popular, with global investors selling energy and tech to buy staples and utilities, it said. Tech allocations fell 8 percentage points to only a net 10 percent overweight, the lowest since January 2009, the survey found.

Fund managers tipped the trade war as the biggest tail risk for a seventh straight month, and the ninth month this year, with 37 percent of citing it, it said, noting that was despite a tentative agreement at the G-20 between China and the U.S. to delay tariffs. Quantitative tightening and a China slowdown rounded out the top-three tail risks, cited by 18 percent and 16 percent of fund managers survey, it said.

A total of 190 participants with an average US$575 billion in assets under management each responded to the global fund manager survey over the 7 to 13 December period, the release said.

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