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Jan 21, 2019

BofAML survey reveals secular stagnation outlook

Investors expect global growth to weaken over the next 12 months

Investors’ expectations for global GDP growth continue to fall, as 60 percent of those surveyed in the Bank of America Merrill Lynch (BofAML) January Fund Manager Survey think global growth will weaken over the next 12 months.

This is the worst outlook on the global economy since July 2008 and below the trough seen in January 2001.

This month’s survey finds the worst outlook on profits since 2008, with 52 percent of investors expecting global profits to deteriorate in the next year. This marks a major reversal from just 12 months ago when 39 percent said profits would improve.

Investors’ worries about the credit cycle continue to climb, with 48 percent of fund managers finding corporate balance sheets to be overleveraged.

For the first time since 2009, corporate leverage is the chief concern among investors, with half of those surveyed preferring corporates to use cash to improve balance sheets, as opposed to increase capital expenditure (39 percent) or return cash to shareholders (13 percent).

This month sees another decline in inflation expectations: just 19 percent of those surveyed expect the global consumer price index to rise over the next year. This marks the second-largest two-month collapse on record and a massive reversal from the recent peak of 82 percent who believed inflation would rise in April 2018.

Even so, only 14 percent of fund managers expect a global economic recession this year: investors are calling out ‘secular stagnation’ – the theory that there will be negligible or no economic growth in an economy – rather than a recession in the next two to three quarters.

Average cash balance ticks up slightly to 4.9 percent, up from 4.8 percent last month. The BofAML ‘Bull & Bear indicator’ has fallen from 2.2 to 2.1, just above the ‘buy’ territory hit on January 3.

A trade war, at 27 percent, tops the list of biggest tail risks cited by investors for the eighth straight month, though concerns have waned since summertime highs. Next on the list are quantitative tightening and a slowdown in China, both coming in at 21 percent.

For only the second time in a year, long US dollar (21 percent) tops long Faang (Facebook, Apple, Amazon, Netflix and Google) and Bat (Baidu, Alibaba and Tencent) at 19 percent as the most-crowded trade cited by investors. The top three are rounded out by short emerging markets at 17 percent.

Crowded positioning in the long US dollar trade looks vulnerable, however, as investors say US dollar valuations are at their highest level since 2002. But emerging market currency valuations are at their lowest level since the survey question was included in 2004.

‘Investors remain bearish, with growth and profit expectations plummeting this month,’ says Michael Hartnett, chief investment strategist at BofAML, in a statement. ‘Even so, their diagnosis is secular stagnation, not recession, as fund managers are pricing in a dovish Fed and a steeper yield curve.’