Investors fret over EU and China

Investors remain in a cautious mood as European sovereign debt and Chinese growth expectations weigh on their minds, according to a new survey by Bank of America Merrill Lynch (BofAML).

Fully 85 percent of fund managers surveyed by the bank expect Greece to default on its debt, with the majority expecting default to occur by the first half of next year.

The largest source of anxiety for an abnormally large negative event – or ‘tail risk’ – comes from European sovereign debt funding, with 60 percent of respondents expressing concern.

The next biggest risks, according to investors, come from a cooling Chinese real estate market (15 percent) and premature fiscal tightening (roughly 12 percent). Among respondents, expectations of Chinese growth are at their lowest level since January 2009.

All this negative sentiment leads one third of survey respondents to think a global recession is ‘fairly likely’ in the next 12 months.

As a result, managers are hoarding cash (39 percent overweight), avoiding bank stocks (34 percent underweight) and reducing their exposure to emerging markets, where overweight allocation has fallen to 9 percent from 30 percent a month ago.

Investors are also limiting their overweight exposure to large-cap growth stocks such as US technology (39 percent overweight) and pharmaceuticals (38 percent overweight), according to the survey.

Risk reluctance

‘Investors remain bearish on global growth, reluctant to increase exposure to risk assets and currently happy to run abnormally high cash balances,’ says Michael Hartnett, chief global equity strategist at BofAML, in a video on the bank’s website discussing the survey results.

Contrarian investors betting on an upside surprise to consensus are looking to a more coherent ‘big bang European policy response’ and a soft landing in China, Hartnett adds. He suggests more bullish investors look to European and emerging market banks and Asian materials stocks for an upside surprise.

An even more bearish outlook than current consensus would come about ‘via European contagion into US growth,’ says Hartnett, adding that investors making downside bets should short US technology, EU energy, global pharmaceuticals and emerging market consumer stocks.
 
A total of 286 global fund managers with $739 bn in assets under management were canvassed between October 7 and October 13 for the survey.