Given the dominance of geopolitical events – particularly the US-China trade talks – it is not surprising that the May Bank of America Merrill Lynch (BofAML) fund manager survey indicates investors are ‘well hedged’ but, interestingly, not positioned for a breakdown in trade talks.
More than one third of investors surveyed have taken out protection against a sharp fall in equity markets over the next three months, the highest level in the survey’s history.
Allocation to global equities has dropped 6 percentage points to 11 percent overweight, emerging markets remain the most preferred region at 34 percent overweight and the UK remains the least favorite, at 28 percent underweight.
Allocation to bonds stays at a seven-year high of 34 percent underweight, as BofAML asserts ‘dovish central banks and risk-off sentiment drive interest rates lower’.
In terms of risks, a trade war – 37 percent – tops the list cited by investors for the 11th time in the past year, followed by a China slowdown (16 percent) and US politics at 12 percent.
Global growth expectations also stay flat from last month, with 5 percent of investors expecting global growth to weaken over the next year and two thirds of those surveyed not expecting a global recession until the second half of 2020 or later.
Investors think US equities would need to fall to as low as 2305 – from their current 2840 – on the S&P 500 before the Fed would cut the Fed funds rate. And very few investors are positioned for a sharp rally in interest rates: seven out of 10 expect interest rates to be broadly range-bound over the next year at between 2 percent and 3 percent, whereas only 4 percent of those surveyed expect yields to return to below 2 percent.
Interestingly, global profit expectations continue to rebound to a nine-month high, rising 15 percentage points from last month, with just 1 percent of investors surveyed saying they expect profits to deteriorate in the next 12 months
The credit cycle remains the primary concern of investors, with 41 percent saying they think corporate balance sheets are overleveraged.
The percentage of fund managers polled who want corporates to ‘de-lever’ has risen 3 percentage points to 46 percent; 34 percent want to see increased capital expenditure, and 12 percent prefer returning cash to shareholders.
Long US tech with 35 percent is cited as the most crowded trade in this month’s survey, followed by short European equities (16 percent) and long US dollar at 15 percent.
‘Investors are well hedged but not positioned for a breakdown in trade talks,’ says Michael Hartnett, BofAML chief investment strategist, in a statement. ‘Investors see little reason to ‘buy in May’ unless the three Cs – credit, the consumer and China – quickly surprise to the upside.’
