BofA-ML survey: Fund managers grow more jittery in August, turning to protection

Knife display at Daiso in SingaporeKnife display at Daiso in Singapore

Global fund managers are still nervous in August, pulling away from equity investments and turning to “insurance” against losses, according to the latest Bank of America-Merrill Lynch fund manager survey released Tuesday.

Fund managers said their equity allocation dropped 22 percentage points on-month to a net 12 percent underweight, erasing nearly all of July’s uptick, the survey found. In June, a net 21 percent of fund managers said they were underweight equities, marking the lowest level since March 2009, during the Global Financial Crisis.

A record 33 percent of fund managers surveyed said they have taken out protection against a sharp equity-market fall in the next three months, marking the highest level since the survey began asking the question in 2008, BofA-ML said.

Trade war jitters persist

The renewed jitters came as 51 percent of the fund managers surveyed said trade war concerns were the top tail risk, up 15 percentage points on-month. That comes as the possibility of a rapprochement on trade between the U.S. and China appears unlikely in the near term, with U.S. President Trump threatening to impose even more tariffs.

(The U.S. announced Tuesday that some products would be removed from the additional 10 percent tariff of US$300 billion on Chinese imports set to go into effect on 1 September. In addition, the government delayed to 15 December the tariff for certain articles, including cell phones, laptops, video game consoles, and certain toys, footwear and clothing.)

On the economy, fund managers remained bearish. A net 48 percent of fund managers surveyed expect global economic growth to weaken over the next 12 months, only slightly less pessimistic than June’s net 50 percent level, which was in line with the 2001-01 and 2008-09 recession levels, BofA-ML said.

A third of fund managers surveyed expect a global recession in the next 12 months, the highest level since 2011.

Fund managers are pessimistic on the corporate earnings outlook as well. A net 84 percent expect less than 10 percent earnings per share (EPS) growth over the next 12 months, a 4 percentage point increase, the survey found. BofA-ML said consensus global EPS forecasts are 8.0 percent for the next 12 months and 10.5 percent for 2020.

Rotating into bonds

There was a rush into bonds, amid fund managers’ expectations interest rates would fall since bond prices move inversely to yields. A net 22 percent of fund managers said they were underweight in bonds, marking a 12 percentage point improvement from July’s net 34 percent underweight, above the long-term average and the highest allocation since September 2011, according to the survey.

A net 43 percent of fund managers expect lower short-term rates, with only 9 percent expecting higher long-term rates over the next 12 months, the most bullish view on bonds since November 2008 during the Global Financial Crisis.

In a bit of cognitive dissonance, a net 15 percent of fund managers said they would like to be overweight in the U.S. market over the next 12 months, but 78 percent also said the region was overvalued.

U.S. equity allocations fall

Allocations to U.S. equities fell 7 percentage points to just a net 2 percent overweight, but still slightly above the long-term average. Europe also wasn’t popular, with a net 3 percent of fund managers underweight on Eurozone equities, down 12 percentage points on-month.

Emerging markets equities were the consensus regional allocation, but a net 12 percent said they were overweight, down 11 percentage points on-month, the survey found.

The allocation to Japanese equities dropped 5 percentage points on-month to a net 9 percent underweight, marking a seven-year low, BofA-ML said. The U.K. remained the least favored region, with allocations dropping 6 percentage points to a net 29 percent underweight as Brexit concerns persisted.

Allocations to cash remained high at 5.1 percent in August, above the 10-year average of 4.6 percent, adding 41 percent of fund managers said they were overweight on cash.

The global fund manager survey had 171 respondents with US$455 billion in assets under management, BofA-ML said.

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