More than a third of fund managers have taken out hedges to protect against a sharp equity-market fall over the next three months, the Bank of America-Merrill Lynch fund manager survey for May found, marking the highest level in the survey’s more than 10 year history.
That comes as 37 percent of fund managers surveyed ranked the trade war as the biggest tail risk, followed by a China slowdown at 16 percent and U.S. politics at 12 percent, BofA-ML said in a release on Tuesday. The U.S.-China trade war has ranked as the top tail risk for 11 of the past 12 surveys, according to the monthly survey.
“[Fund manager survey] investors are well-hedged but not positioned for a breakdown in trade talks” said Michael Hartnett, chief investment strategist at BofA-ML, said in the statement.
The survey found that fund managers were removing their underweights in eurozone and bank equities and adding to crowded tech positions, while cutting exposure to bond proxies and commodities. Bond proxies would be considered defensive in the event of market turbulence.
In a full-blown trade war, technology companies would likely be among the most hurt by tariffs.
Allocations to commodities dropped 11 percentage points to a net 8 percent underweight amid trade war concerns, it said.
Fund managers’ equity allocation dropped 6 percentage points on-month to a net 11 percent overweight, BofA-ML said.
U.S. equity allocation slipped 2 percentage points to a net 2 percent overweight, while eurozone equity allocation jumped 9 percentage points on-month to 9 percent overweight, BofA-ML said. Around 16 percent of fund managers said shorting European equities was among the most crowded trades, second only to long U.S. tech, the survey found.
Allocations to technology were up 6 percentage points to a net 34 percent overweight, marking a 14-month high and making it the No.1 sector in the survey, it said.
Emerging market equities allocations were unchanged at a net 34 percent overweight, with the segment a consensus overweight, it said.
U.K. equities remained fund managers’ least-favored region, with allocation at 28 percent underweight for a third straight month amid continued Brexit delays, BofA-ML said. While that’s an improvement from the 41 percent underweight in March 2018, few investors own the region, BofA-ML said.
Growth expectations have steadied: just 5 percent of fund managers expect global economic growth to weaken over the next 12 months, compared with January’s 60 percent, which was around 2000-01 and 2008-09 recession levels, the survey found.
The global fund manager survey included 195 participants with US$588 billion in assets under management; the survey period ran from 3 to 9 May.
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