Investors believe that the global economy will slow significantly in the coming 12 months but will avoid dipping back into recession, according to the BofA Merrill Lynch Survey of Fund Managers for August.
A net 13 per cent of respondents to the global survey believe that the world economy is headed for a period of weaker growth. The reading represents a significant swing since July when a net 19 per cent were confident the economy would improve. Investors’ forecast for corporate profits shows the biggest downwards swing in the survey’s history. A net 30 per cent of the panel expects the profit outlook to deteriorate in the coming 12 months. In July, a net 11 per cent forecast an improvement in profits.
However, a net 42 per cent of investors still hold the view that a global recession is unlikely in the coming year. The survey took place from August 5 to August 11, when world equities fell by 12.3 per cent.
Cash holdings have soared to their highest levels since the depths of the credit crisis as investors have moved out of equities, notably cyclical stocks. Cash balances have climbed close to their high of 5.5 per cent in December 2008. Global investors hold an average of 5.2 per cent of portfolios in cash, up from 4.1 per cent in July. A net 30 per cent are overweight cash compared with their benchmark. Both numbers are at their highest level since March 2009.
Asset allocators have scaled back equity positions faster than in any previous month in the survey’s history. A net 2 per cent remain overweight equities, down from a net 35 per cent in July. Asset allocators have also reduced their underweight positions in bonds and reduced holdings in commodities and alternative investments.
“Flows out of equities into cash have reached capitulation levels, especially in the US, but it’s significant that a revival in optimism towards China has survived the global correction,” says Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research.
“Investors are waiting for convincing, coordinated action from governments before recommitting their cash to equities,” says Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.
Asset allocators have reduced their positions in the US more aggressively than in any other region and at the sharpest rate the survey has ever recorded. Asset allocators responding to the global survey moved slightly underweight US equities. A net 1 per cent of the panel is underweight this month, compared with a net 23 per cent overweight in July.
At the same time, US fund managers have demonstrated a U-turn in economic sentiment. A net 14 per cent of the US panel believes their economy will weaken, in contrast to the net 29 per cent predicting a stronger economy in June.
The eurozone is the one region to have avoided the global equities sell-off. The panel remains underweight eurozone equities, but the net per centage underweight the region has fallen to 15 per cent in August, from 21 per cent in July. Within Europe, however, the story has darkened. A net 71 per cent of the regional panel expects the European economy to weaken, up starkly from a net 22 per cent in July; although, a strong majority rejects the idea that Europe will go into recession.
Asset allocators have reduced their overweight position in global emerging market (GEM) equities. A net 27 per cent of the global panel is overweight the region, a fall of 8 per centage points month on month. GEM fund managers are slightly less optimistic than a month ago, but the shift in sentiment is far less pronounced than their colleagues in the US and Europe.
That could reflect a view from GEM fund managers and their counterparts in Japan and Asia-Pacific that China’s outlook is brighter. A net 11 per cent of fund managers from these regions believe that China’s economy will weaken, but that is down from a net 24 per cent in July and a net 40 per cent in June.
Global asset allocators have departed cyclical stocks en masse over the past month. Allocations towards industrials suffered a negative 27 per centage point change from July to August. A net 16 per cent of global allocators are underweight Industrials, compared with a net 11 per cent overweight in July. The proportion of respondents overweight energy stocks declined to a net 14 per cent from a net 27 per cent a month ago. While a large majority of allocators remain underweight banks, the month-on-month swing in the sector was a modest 4 per centage points.
The move out of cyclical stocks reflects how three-quarters of investors this month identified business cycle risk as the number one risk to market stability – up from 42 per cent in July.
Investors have taken the view once more that gold is overvalued. In July, the net per centage taking this view dipped to a net 17 per cent. But with gold hitting new highs, a net 43 per cent of August’s panel believe it is overvalued.
