Investors have added risk, rotating into cyclical plays (equities, Europe, industrials, banks) and out of defensive ones (bonds, real estate investment trusts, utilities and staples), according to the latest Bank of America Merrill Lynch (BofAML) fund manager survey for July.
Allocation to global equities retraces almost all of last month’s dip, rising 31 percentage points to 10 percent overweight, reveals the survey.
Looking at regional equity allocations, the US and the eurozone tie as the second-most favored regions, both at 9 percent overweight, with emerging markets continuing to top the list, with 23 percent of investors surveyed indicating they are overweight in the asset class.
Global growth expectations have risen from last month’s 10-year low, rebounding 20 percentage points to 30 percent of investors surveyed expecting global growth to weaken over the next year. But only 1 percent of fund managers surveyed expect a higher global consumer price index in the next year – the most bearish inflation outlook for seven years.
Almost three quarters (73 percent) of investors think the business cycle is a risk to financial market stability, marking an eight-year high.
A record 48 percent of investors are concerned about corporate leverage, and global profit expectations remain flat, with 41 percent of those surveyed saying they expect profits to deteriorate in the next year. Corporate payout ratios – including share buybacks – are too high, according to a record net 38 percent of fund managers.
The average cash balance has fallen to 5.2 percent from 5.6 percent – still above the 10-year average of 4.6 percent – and investors’ allocation to cash has ticked down two percentage points to 41 percent overweight, also well above the long-term average.
Concerns about a trade war – 36 percent – have waned but still top the list of tail risks cited by investors; monetary policy impotence climbs to the second spot at 22 percent and a China slowdown (12 percent) and bond market bubble (9 percent) round out the top four.
Long US treasuries – 37 percent – remains at the top of the list of the most crowded trades identified by fund managers, ahead of long US tech (26 percent) and long investment grade corporate bonds at 12 percent.
‘The dovish Fed and trade truce have caused investors to reduce cash and add risk,’ says Michael Hartnett, BofAML chief investment strategist, in a statement. ‘But their expectations of an earnings recession and debt deflation still dominate sentiment. The pain trade for the summer remains up in stocks and yields.’