BofA-ML survey: Fund managers step back from bearish brink, but jitters persist

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Global fund managers were a tad less pessimistic in July, according to the Bank of America-Merrill Lynch fund manager survey (FMS) for the month, but that didn’t prevent them from continuing to fret over economic risks.

“The dovish Fed and trade truce have caused investors to reduce cash and add risk,” said Michael Hartnett, chief investment strategist, in a statement Tuesday. “But their expectations of an earnings recession and debt deflation still dominate sentiment. The pain trade for the summer remains up in stocks and yields.”

June’s survey had found global fund managers were at their most pessimistic since the Global Financial Crisis of 2008 amid concerns over the trade war, potential recession and monetary policy impotence.

FMS economic growth expectations rebounded somewhat, with a net 30 percent of fund managers expecting global growth to weaken over the next 12 months, marking a 20 percentage point improvement from June, the survey found.

Bearish on the economy

However, 79 percent of fund managers surveyed were bearish on both the growth and inflation outlook over the next 12 months, a 5 percentage point increase from June and the most bearish view since September 2016, BofA-ML said.

Fund managers still expect a bleak earnings outlook, with 41 percent of those surveyed saying they expect a deterioration over the next 12 months, unchanged from June’s outlook, the statement said.

However, the gloomy economic outlook didn’t stop fund managers from looking at risky assets, although the survey found they were still overweight on assets that outperform when interest rates and earnings fall.

Fund managers moved some funds out of cash, with the average cash level at 5.2 percent, down 0.4 percentage point, but still well above the 10-year average of 4.6 percent, BofA-ML said.

The cash allocation slipped, with a net 41 percent of fund managers surveyed saying they were overweight, down 2 percentage points on-month, but that remained well above long-term averages, the survey said.

Equity allocations rise

The FMS equity allocation retraced nearly all of June’s drop to the lowest levels since March 2009, during the Global Financial Crisis, the survey said. In July, FMS equity allocation rose 31 percentage points to a net 10 percent overweight, although that was still below long-term averages, the survey found.

Allocations to U.S. equities increased, with a net 9 percent of fund managers saying they were overweight, up 4 percentage points on-month, the survey found.

Eurozone equity allocations jumped, with a net 9 percent of fund managers saying they were overweight, a 17 percentage point increase on-month, the survey found. Emerging market equities saw allocations rise, with a net 23 percent of fund managers overweight, up 2 percentage points on-month, the data showed.

Bond allocations fell, with a net 34 percent of fund managers saying they were underweight, a drop of 12 percentage points from June, BofA-ML said.

Top tail risks

The trade war was still named the biggest tail risk after topping the charts for 15 of the past 17 surveys, but the number of fund managers calling it the top risk declined by 20 percentage points to 36 percent, the survey found.

Fears over trade may have slipped amid “cease fire” and resumption of talks between the Trump administration and China, but concerns over the number two ranked risk, monetary policy impotence, jumped 11 percentage points in July to 22 percent of fund managers surveyed, the statement said.

The survey, which ran from 5 to 11 July, had 162 participants with US$489 billion in assets under management, BofA-ML said.

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