Investors are bullish on rates, according to the Bank of America Merrill Lynch (BofAML) fund manager survey for August.
The survey highlights that 43 percent of investors surveyed expect lower short-term rates and only 9 percent expect higher long-term rates over the next 12 months. Taken together, this is the most bullish survey view since November 2008.
A recession is likely in the next 12 months, according to 34 percent of investors surveyed, while 64 percent of respondents think it is unlikely. This, however, marks the highest recession probability since October 2011.
A quarter of investors say fiscal policy is ‘too restrictive’ and just 11 percent say monetary policy is ‘too stimulative’ – combined, this is the most hawkish policy mix since November 2016.
Trade war concerns, at 51 percent, dominate the list of tail risks cited by investors, while monetary policy impotence remains in the second spot at 15 percent, a China slowdown and a bond market bubble round out the top four, each at 9 percent.
‘Investors are the most bullish on rates since 2008 as trade war concerns send recession risk to an eight-year high,’ says Michael Hartnett, BofAML chief investment strategist, in a statement. ‘With global policy stimuli at a two and a half year low, the onus is on the Fed, the European Central Bank and the People’s Bank of China to restore animal spirits.’
A record 50 percent of investors are concerned about corporate leverage: 46 percent say they want corporates to use cash flow to improve balance sheets and 36 percent prefer to see corporates increase capital expenditure – while 13 percent indicate they would like to see corporates return cash to shareholders via dividends or buybacks.
Given the current course of central bank policies, the asset class most vulnerable to a classic investment bubble is corporate bonds, according to 33 percent of respondents. Government bonds come in second at 30 percent, followed by US equities with 26 percent.
And the allocation to bonds climbs 12 percentage points to 22 percent of investors saying they are underweight – the highest allocation since September 2011, with the allocation to global equities retracing almost all of last month’s uptick by falling 22 percentage points to 12 percent underweight.
In terms of regional equity allocations, emerging markets continue to top the most-favored list, but are trending down, falling 11 percentage points to 12 percent of investors surveyed – indicating they are overweight the asset class – and US equities come in second, with just 2 percent overweight.
The allocation to Eurozone equities is the big loser this month – down 12 percentage points to 3 percent of fund managers saying they are underweight, with 33 percent saying the euro is cheap – the lowest level since 2002.
Looking ahead, US equities are the most preferred region: 15 percent of fund managers say they would like to be overweight the asset class over the next 12 months, despite 78 percent of respondents indicating the region is overvalued – the combination of these two points marks the second most extreme level on record.