Investors approaching ‘extreme bearishness,’ warns BofAML

Dec 18, 2018
Allocation to global equities falls to two-year low

Investors are approaching ‘extreme bearishness’ according to the Bank of America Merrill Lynch (BofAML) December Fund Manager Survey.

Just 9 percent of investors surveyed expect a global economic recession in 2019, but 53 percent expect global growth to weaken over the next 12 months – the worst outlook on the global economy since the start of the global financial crisis in October 2008.

As a result, investors have poured into bonds: this month’s survey finds the biggest ever one-month rotation into the asset class, with bond allocation rising 23 percentage points to 35 percent underweight, marking the highest bond allocation since the Brexit vote in June 2016.

Correspondingly, allocation to global equities has fallen 15 percentage points to a two-year low of 16 percent overweight.

Looking at equity allocation regionally: the US has fallen 8 percentage points to 6 percent overweight, the eurozone has seen a decline of 8 percentage points from last month, taking the region to underweight for the first time in two years, and the UK has fallen 12 percentage points to 39 percent underweight, the second-biggest underweight on record, as the approaching Brexit deadline stokes renewed uncertainty.

Emerging markets saw a 5 percentage-point increase to 18 percent overweight, marking their return as the number one region of choice for investors.

This month’s survey also finds the worst profits outlook in a decade, with 47 percent of investors expecting global profits to deteriorate in the next 12 months and 57 percent of those polled thinking corporate margins will deteriorate in the next year – a six-year low.

Other signs that trouble may lay ahead include 46 percent of fund managers surveyed believing corporate balance sheets are overleveraged – the highest on record.

At 37 percent, a trade war tops the list of biggest tail risks cited by investors for the seventh straight month, followed by quantitative tightening at 18 percent and a slowdown in China at 16 percent.

Average cash balances have ticked up slightly to 4.8 percent, up from 4.7 percent last month.

The most common preferred use of corporate cash flow for investors is improving balance sheets at 46 percent – the highest level since 2009 – followed by increasing capital expenditure at 34 percent, the lowest level since 2012, and returning cash to shareholders at 13 percent.

For the first time since January 2018, long Faang (Facebook, Amazon, Apple, Netflix and Google) plus Bat (Baidu, Alibaba and Tencent) at 20 percent are no longer the most crowded trade cited by investors, replaced this month by long US dollar at 25 percent, with the top three rounded out by short emerging markets (19 percent).

‘Investors are close to extreme bearishness,’ warns Michael Hartnett, chief investment strategist at BofAML, in a statement. ‘All eyes are on the Fed this week – it begins its two-day policy meeting today – and a dovish message could equal a bear market bounce.’

This month also sees the third-biggest decline in inflation expectations, down 33 percentage points to net 37 percent on expectations the global consumer price index will rise over the next year – a big reversal from the recent peak of net 82 percent in April.

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