Bank of America Merrill Lynch survey finds recession fears have faded, with more favouring riskier assets
While investors around the world have been positioning their portfolios based on a sense of fear, global fund managers appear to be shifting their positions based on fear of a different sort.
In a survey report released Wednesday, Bank of America Merrill Lynch said that global fund managers added risk in November as they stopped gearing their portfolios explicitly toward assets that outperform in a low-growth, low-inflation environment.
“Investors are experiencing FOMO — the fear of missing out — which has prompted a wave of optimism and jump in exposure to equities and cyclicals,” said Chief Investment Strategist Michael Hartnett in a statement.
Out of 230 fund managers with a collective US$700 billion in AUM, Merryll found that a net 6% expect a stronger global economy in 2020, in contrast to a survey the previous month where 31% of participants said they expected a recession over the next year. The change represented the biggest month-on-month leap on record, according to the firm.
A net 31% of investors in the latest survey shared expectations of higher global consumer prices in the next year, up 29 points from October. Forecasts of a steeper global two-year/10-year yield curve developing in the coming months reached a three-year high of 61%, up from a net -30% last December.
When asked which asset class would perform best next year, 52% said they expect equities to shine; 21% chose commodities, while 10% bet on cash. Despite the crowded activity in fixed income, particularly for long US Treasuries, fixed income was the last asset participants expected to perform well next year.
Merrill also observed the weakest outlook on the US dollar since September 2007 as 37% of those polled said they expected a depreciation in the greenback in the next 12 months. Global corporate profit expectations also grew stronger, improving by 25 points as a net 10% of investors expected a decline in profits over the next year.
Participating fund managers reported cash levels of 4.2%, down from 5% in October; it was the largest month-on-month drop in three years as well as the lowest cash balance since June 2013. Investors’ cash allocation went down 20 points to 18% overweight, falling below the long-term average of 21%.
Allocations to global equities saw a 20-point month-on-month lift to a net overweight of 21%. Merrill reported a broad switchover from bonds to equities among investors as bond allocations slipped nine points to 47% underweight.
When asked about tail risks, the largest number of participants (39%) continued to cite trade war concerns as the most pressing. A potential bond-market bubble was the biggest risk for around one sixth (16%) of investors; 12% cited monetary policy impotence, while a slowdown in China was the biggest issue weighing on the minds of 11% of investors.
