Fund managers have grown more dispirited about the potential for a trade war resolution, according to the Bank of America-Merrill Lynch fund manager survey for October, released Wednesday.
Around 43 percent of the fund managers surveyed now think the U.S.-China trade war is the “new normal,” up from 38 percent in September, compared with 36 percent still holding out hope of a resolution before the 2020 U.S. presidential election, up from 30 percent in September, the survey found.
The trade war remained the top tail risk for 40 percent of fund managers, steady with September’s level, while monetary policy impotence and a bond-market bubble were picked by 13 percent each, the survey found. The trade war has topped the tail risk charts for 18 of the past 20 surveys, BofA-ML said.
Fund managers also remained bearish on the economic outlook, with 31 percent expected a recession in the next 12 months, down from 38 percent in September, compared with 67 percent who see it as unlikely, up from September’s 59 percent, the survey found.
September had posted the highest net recession fear since August 2009, during the Global Financial Crisis, BofA-ML said last month.
Whether or not there’s a recession, fund managers are pretty gloomy about the economic outlook: A net 37 percent of fund managers expect global growth to weaken over the next 12 months, compared with a net 28 percent in September, 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.
The growth gloominess wasn’t absolute: 9 percent expected growth to get a lot weaker, 53 percent said “a little weaker,” and 13 percent expected the status quo, while 23 percent expected growth would be “a little stronger,” and just 1 percent said “a lot stronger,” the survey found.
Fund managers were pretty clear on what types of lights they want to see at the end of the economic tunnel: 75 percent said ending the trade war would be the most bullish bullish catalyst for stocks over the next six months, followed by German fiscal stimulus, a 50 basis point rate cut from the U.S. Federal Reserve or a Chinese infrastructure package, BofA-ML said.
Bearish on corporate profits
On the corporate front, fund managers were a tad less bearish, with a net 35 percent saying they expected profits to deteriorate over the next 12 months, improving from September’s net 45 percent, the survey said. BofA-ML noted the consensus global 12-month forward earnings per share forecast is for a 3.3 percent contraction.
In the markets, fund managers sold bonds for equities in October, with bond allocations slipping 2 percentage points to a net 38 percent saying they were underweight, an allocation level still above the long-term average, BofA-ML said. That compares with August, when a net 22 percent of fund managers said they were underweight bonds, marking the highest allocation to the asset class since September 2011, BofA-ML said.
Equity allocations increased by 5 percentage points on-month to a net 1 percent of fund managers saying they were overweight, a level that’s below the long-term average, the survey said.
But fund managers were still cautious, picking up defensive sectors such as healthcare and consumer staples, while getting out of cyclicals such as materials and banks, BofA-ML said.
Rotating out of bonds
U.S. equity allocations slipped, falling 2 percentage points to 15 percent overweight, above its long-term average and making it the most-preferred region among fund managers surveyed, BofA-ML said.
Eurozone equity allocations edged down 1 percentage point this month to a net 1 percent overweight, below the long-term average, but off January’s low of a net 11 percent underweight, the survey found.
Emerging market equity allocations fell 2 percentage points on-month to a net 9 percent overweight in October, below the long-term average, the survey found.
Japanese equity allocations fell 5 percentage points on -month to a net 4 percent underweight, below its long-term average, but off August’s seven-year low of 9 percent underweight, BofA-ML said.
U.K. equity allocations declined 2 percentage points to a net 32 percent underweight amid long-drawn Brexit concerns, remaining below long-term averages, the survey found.
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