What to make of trade wars, a shift into defensive assets and talk of multiple rate cuts this year?
These are curious and uncertain times for global markets, with the FTSE 100 index and S&P 500 sitting on sizeable gains for June, but a survey of fund managers reporting that investors are the most pessimistic they've been since the financial crisis.
The “bears all round” findings from Bank of America Merrill Lynch (BoAML) will dominate today's headlines, driven by growing fears over the state of US-China trade relations and the weakening economic picture. But it's worth remembering there's a big divergence in opinion in markets, with JP Morgan Asset Management recently highlighting good reasons to stay invested.
That strategy was borne out by events towards the end of last year, when markets were full of doom before a strong recovery rewarded those investors who stayed put or took the opportunity to further diversify their portfolios for the start of 2019.
JP Morgan noted that investors had been finding opportunities in higher quality value-oriented and cyclical stocks, with Brexit-hit UK equities also still trading at a significant discount to the broader market despite the first quarter gains.
Trade tariffs remain the biggest risk to the global outlook, particularly if the G20 summit in Japan passes later this month with no thaw in US-China relations. That will make it even more likely that the US Federal Reserve would have to cut rates at its July meeting.
The Fed may even end up easing monetary policy by more than the market expects if a deepening of trade hostilities causes the US dollar to surge in the face of a weaker yuan, and as other countries are forced to devalue.
According to the Bank of America Merrill Lynch fund managers survey, 56% of investors see the trade war as the top tail risk to the market, up 19 percentage points from May.
This surge in pessimism caused the allocation to global equities to slide 32 percentage points from May to a net 21% underweight. That's the lowest allocation to equities since March 2009 and the second-biggest one-month drop on record.
The survey of money managers found that investors had rotated from cyclical plays such as equities, banks, Europe and tech into defensive ones, including staples, utilities, bonds and cash. This reflects the net 50% of investors who expect global growth to weaken over the next year, with a record high 87% of investors saying the world economy is in the late cycle.
Average cash balances soared to 5.6% from 4.6% for each of the last three months, marking the biggest jump in cash since the debt ceiling crisis in 2011.
Significantly, US government bonds represent the most crowded trade for investors for the first time in the survey's history, replacing US tech stocks.
Michael Hartnett, BoAML's chief investment strategist said: “Fund manager survey investors have not been this bearish since the global financial crisis, with pessimism driven by trade war and recession concerns. The tactical ‘pain trade' is higher yields and higher stocks, particularly if the Fed cuts rates on Wednesday.”
The global fund manager survey was conducted between June 7 and 13 and involved 230 participants with US$645 billion assets under management.
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