US shares (naturally big tech companies such as Amazon), cash and backing the US economy were the favoured investment strategies from big global investors, many of whom remain bullish on the US economy according to the September survey from Bank of America Merrill Lynch (BAML).
“Investors are holding on to more cash, telling us they are bearish growth and bullish US decoupling (from the rest of the global economy),” said Michael Hartnett, BAML’s chief investment strategist.
At the same time, it is not a wholly bullish outlook, big investors are gloomier on the chances of global growth maintaining its current solid level and are becoming warier that it will slow into 2019.
Despite all the optimism in the September survey, BAML’s September survey found investors’ outlook on economic growth had worsened significantly, driving them to increase their holdings of cash. The survey covered managers overseeing $US724 billion in assets.
A net 24% of those surveyed expected global growth to slow in the next year, up from just 7% in August. This was the gloomiest outlook since December 2011.
A trade war remained the biggest tail risk cited by investors. September was the fourth month in a row this was mentioned as the biggest fear, though its dominance was receding.
But that might change as the survey was completed before the latest tariffs President Trump imposed (10% rising to 25% at the end of this year) on another $US200 billion of Chinese exports to the US.
Fears of a slowdown in China are rising, as are worries about rising global interest rates (although the Bank of Japan left its key rate untouched for the 32nd month in a row yesterday).
As a result of this rising level of gloom, cash holdings of big global investors rose to an 18-month high of 5.1%, from 5.0% in August and a 4.5% average over the past 10 years.
BAML said that overall allocation to equities fell 11 percentage points to a net 22% overweight and close to July’s levels which were the lowest in 18 months.
But despite this gloom, big investors are maintaining their long affair with mega-cap tech stocks. BAML said that as a result, the “most crowded” trade for the eighth straight month was “Long FAANG and BAT” – acronyms for US tech giants Facebook, Amazon, Apple, Netflix and Google, and China’s Baidu, Alibaba and Tencent.
Warren Buffett’s liking for Apple shares is a good example of this ongoing affair with these mega techs, as is his wry sorrow of not noticing Amazon years ago.
Big investors retained a preference for going short on emerging market equities (and you can probably through Australian big caps like BHP and the Aussie dollar into that mix) followed by long dollar positions because of the belief US rates will go on rising (as we will see next week when the US Federal reserve meets).
Big investors’ liking for US shares over elsewhere remains strong. BAML said their allocations to US shares rose to the biggest overweight since January 2015, while allocation to eurozone equities fell to an 18-month low.
That’s because big investors see the stronger US economy has decoupled from the rest of the world, meaning the chances of higher returns are better in America. But much of that is due to the stimulus from the Trump tax cuts which many economists see starting to fade this quarter and next.
BAML said investors’ outlook for US corporate profits was at its most favorable in the survey’s history, with the biggest divergence with emerging market profits since January 2014.
But nearly half of investors (48%) thought the current decoupling would as US growth slows, but 24% still see it rising.
Just 28% saw growth in Asia and Europe accelerating. That also helps explain the weakness in US shares in recent months.
Allocation to emerging stocks has fallen to a 10% underweight, the lowest since March 2016. BAML said that was a “massive reversal” from the 43 percent overweight measured in April 2018 when emerging markets were the investors’ favorite.
As to sector allocations, the survey noted: “September rotation shows investors are selling emerging markets, banks and materials in favor of Japan, healthcare, and industrials.”
And investor positioning to commodities is at a year low and they are now underweight, which also helps explain the lack of attraction of Australian shares for many global investors.
