Fund managers’ recession expectations have hit levels last seen during the Global Financial Crisis, according to the Bank of America-Merrill Lynch survey for September, released Tuesday.
But even with the bearishness, interest in stocks has begun to rebound, the survey found.
Around 38 percent of the fund managers surveyed expect a recession in the next 12 months, compared with 59 percent who see a recession as unlikely, making for the highest net recession fear since August 2009, during the Global Financial Crisis, BofA-ML said.
A net 28 percent of fund managers expect global growth to weaken over the next 12 months, up 20 percentage points from August, BofA-ML said. But that was a tad more optimistic than June’s net 50 percent, which was the most bearish since the 2000-01 dotcom bust and 2008-09 Global Financial Crisis recessions, the bank said.
In addition, fund managers appear to be pinning their hopes on fiscal policy, with a net 37 percent saying it’s “too restrictive,” compared with 33 percent saying it was too “stimulative” in November 2018, the survey said.
Trade war drives bearishness
The ongoing U.S. trade war is driving bearishness, BofA-ML said. Around 38 percent of fund managers said the U.S.-China trade war had become the new normal, while only 30 percent expect a resolution before the next U.S. presidential election, the survey found.
Trade wars remained the No.1 tail risk pick this month, after topping the charts for 17 of the past 19 surveys, but concerns fell 11 percentage points to 40 percent saying it was the top tail risk, BofA-ML said.
Fears over the No.3 tail risk pick, a bond market bubble, jumped 4 percentage points to 13 percent of fund managers this month, tying with the No.2 pick, monetary policy impotence, the survey found.
When it comes to companies, fund managers’ remained bearish on earnings, the survey found. A net 45 percent of fund managers expect profits to deteriorate over the next 12 months, although that was an improvement of 1 percentage point on-month, it added.
But despite the gloomy outlook, allocations to equities have recovered slightly, BofA-ML said.
Equity allocations rose 8 percentage points on-month to a net 4 percent underweight, improving from June, when a net 21 percent of fund managers said they were underweight, marking the lowest level since March 2009, BofA-ML said.
Bond market jitters
In line with concerns of a bond market bubble, allocations to bonds fell 14 percentage points on-month to a net 36 percent of fund managers saying they were underweight, the statement said.
However, cash remained attractive to fund managers in September, with a net 39 percent overweight, down 2 percentage points on-month but still well above long-term averages, BofA-ML said.
Regionally, U.S. equities attracted interest, with allocations there rising 15 percentage points on-month to a net 17 percent overweight, making it the most preferred region among fund managers, BofA-ML said.
Eurozone equities also posted a recovery, with allocations up 6 percentage points on-month to a net 3 percent overweight, compared with a net 11 percent underweight in January, the survey found.
Allocations to emerging markets continued to decline, shedding 2 percentage points on-month to a net 11 percent overweight, the survey found.
Japan equity allocations recovered 11 percentage points on-month to 1 percent overweight in September after touching a seven-year low of a net 9 percent underweight in August, the survey found.
The survey period was from 6 to 12 September, with a total of 235 panelists with US$683 billion in assets under management participating, BofA-ML said.