The recent sell-off in global markets has seen a dramatic shift in sentiment among big fund managers, especially towards the US stock market.
At the same time, the same people who were spurning emerging markets are suddenly more enamored of what has been a risky trade (in their view) for much of the year – certainly since the Fed’s rate rises and Donald Trump’s trade war hysterics stepped up earlier this year.
According to the latest, the monthly Bank of America Merrill Lynch (BAML) fund managers October has seen global fund managers turn the most pessimistic on global growth prospects since the depths of the financial crisis in the fall of 2008, but aren’t yet negative enough to offer a contrarian buy signal.
The survey was released on the day when Wall Street had its strongest day’s trading for months with the Dow, S&P500 and the Nasdaq all up well over 2% for the day. The Australian market jumped 69 points, or 1.2% yesterday as well
BAML said the pessimism on the global economy is rising amid rising trade tensions and expectations the US central bank will carry on tightening despite the tumult in equity markets.
Fund managers surveyed by Bank of America Merrill Lynch this month said they had stepped up hoarding cash.
A record 85% of fund managers say the global economy is in late cycle, 11 percentage points ahead of the prior high recorded in December 2007.
“Investors are bearish on global growth, but not bearish enough to signal anything but a short-term bounce in risk assets,” said Michael Hartnett, the firm’s chief investment strategist in commentary with the survey.
And when asked about the outlook for the global economy over the next year, a net 38% of respondents said they expect deceleration, the highest reading since November 2008.
Growth expectations in the survey peaked in January 2018.
Interestingly the rise in US bond rates (measured by the key yield on 10 years Treasuries remains the best indicator of nervousness. It hit a seven-year high of 3.26% at the start of last week and traded around 3.16% in Asia yesterday. The fall was driven by safe-haven buying by nervy investors.
The survey found investors don’t expect a rotation from equities to bonds until the 10-year yield hits 3.7%, according to the average weighted response, the highest since the question was first included in the survey in March and 20 basis points higher than in April.
On the allocation front, funds managers didn’t budge much when it comes to global equities, holding steady at a net 22% overweight, near July’s recent low of net 19%.
But the survey found allocation to US shares reversed much of the climb seen over the previous two months, falling 17 percentage points to a net 4% overweight, while Japan has become the most favored equity region.
Allocation to bonds fell 5 percentage points to 50% underweight, but still well off the record low of a net 69% underweight seen in February.
The trade war talk topped the list of tail-risk fears for a third straight month, with 35% of respondents citing it as their top worry. Quantitative tightening by central banks continued to make inroads, however, with 31% citing concerns about the Fed’s unwinding of its balance sheet as their top fear. A China slowdown was at the top of the list for 16% of respondents.
Interestingly given all the instability about emerging markets, a record number of investors in the survey now think emerging market currencies are undervalued.
Crumbling under pressure from the strong dollar, along with crises in Turkey and Argentina, developing market currencies have plunged this year (taking the Aussie dollar with them as the greenback has risen).
More recently they have been hit by a sharp stocks selloff, leaving MSCI’s emerging currency index down 4.5% on the year and more than 7% off their March peaks.
A net 51% of investors surveyed by BAML said they thought emerging market currencies are undervalued – the cheapest valuation since the survey began.
More than 20% of investors said the dollar was significantly overvalued, meanwhile, the second highest U.S. dollar valuation reading.
Allocation to emerging market equities rose 15 percentage points, having hit its lowest since March 2016 in last month’s survey. BAML strategists put the increase down to investors betting the U.S. dollar has peaked.
“October rotation shows buying of peak U.S. dollar assets via EM, energy and commodities and selling of cyclicals and growth,” they wrote, adding that buying EM assets was a key contrarian trade.
The survey, conducted Oct. 5-11(while the market instability was at its peak) and covered investors managing $US646 billion, with $US518 billion with global coverage.
