Big global investors are now very worried about the fallout from Donald Trump’s trade war with America’s allies and China and as a result, they have gone all negative on some shares (not the US and not mega techs) and on some economies.
According to the July Band of America/ Merrill Lynch survey of fund managers, the percentage of those polled who expect the global economy to be stronger a year from now is at its lowest reading since February 2016.
Reflecting this growing concern, this reading has fallen sharply so far this year. Currently, a net of negative 11% expects the global economy to be stronger in 12 months, down from a positive 40% at the start of 2018. (That is more fund managers reckon the economy is going to weaken than believe t will be stronger in a year’s time).
A primary factor behind the sentiment shift in the survey was the threat of a trade war between the US and China and as a result 60% of those managers surveyed said that trade was the biggest tail risk facing markets; this issue had the highest investor conviction of any since the European Union debt crisis in 2012.
“Investor sentiment is bearish this month, with survey respondents eyeing the risks from a possible trade war,” said Michael Hartnett, BofA’s chief investment strategist. “Equity allocation has fallen notably while growth and profit expectations have slumped,” he said.
That has helped convince investors to cut their exposure to stocks. According to the survey equity allocations fell by 14 percentage points to a net overweight reading of 19% overweight in July, the lowest level since November 2016.
This reallocation was a function of weaker views toward international stocks. Investor allocations to European equities fell by 8 percentage points to a net overweight level of 12%, the lowest since December 2016.
Allocations to emerging markets tumbled by 23 percentage points in June — the largest monthly drop in two years — bringing holdings to a net underweight of 1%.
But exposure to US stocks rose, attracted by the lure of the mega techs such as Amazon and Apple. Allocations rose by 8 percentage points to 9% overweight, the highest level since February this year.
There’s a sense of a flight to safe havens in this rise as the tech stocks were the big attractor (its the sector that has kept Wall Street growing in 2018).
Allocation to tech rose by 10 percentage points to net 33% overweight, “making it the most favored sector this month,” according to the survey.
But as they continued to invest in this sector, the same investors reckon this is a dangerous place to be. For a sixth straight month, respondents to the survey said that “long FAANG+BAT” was the most crowded trade in the market.
Some 53% of those polled cited this group, which refers to five high-flying US internet and technology names – Facebook, Apple, Amazon, Netflix, and Google-parent Alphabet, as well as three Chinese ones – Baidu, Alibaba, and Tencent.
