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Apr 15, 2020

Investors display ‘extreme’ pessimism amid recession fears

Fund managers hold highest levels of cash since 9/11 attacks, finds survey

Investors feel ‘extreme’ levels of pessimism about the economic damage of Covid-19 and are holding the highest levels of cash since the 9/11 terrorist attacks, according to research by Bank of America Merrill Lynch (BofAML).

The global fund manager survey, conducted between April 1 and April 7, finds that cash levels have risen to 5.9 percent in April, up from 5.1 percent in March and 4 percent in February. ‘We say April = peak pessimism,’ write the report authors. 

The survey also finds a record 93 percent of respondents expect a recession in 2020, beating the previous high of 86 percent recorded in March 2009. The ‘entrenched recession concerns’ have led investors to cut positions in cyclical assets such as equities, banks and emerging markets, while moving into defensive holdings such as staples, cash and tech, notes the report.

Despite the negativity in the survey, global stock markets have rallied sharply since hitting lows last month. Over the last two and a half weeks, the S&P 500 has risen more than 25 percent and the FTSE 100 around 15 percent. 

The rally has coincided with equity strategists turning more bullish. This week Goldman Sachs said in a note that stocks were unlikely to hit new lows given the aggressive action taken by the US government. ‘These policy actions mean our previous near-term downside of 2,000 [for the S&P 500] is no longer likely,’ said the note, according to a report by Bloomberg.

In BofAML’s survey, 52 percent of investors say they now expect a U-shaped recovery, significantly more than those predicting a W-shaped (22 percent) or V-shaped (15 percent) rebound. The biggest tail risk to the economy is seen as a second wave of Covid-19 infections (57 percent), followed by a systemic credit event (30 percent). 

Balance sheet call

In addition, investors used the survey to call for less spending on buybacks and dividends. When asked what they would like companies to do with cash flow, 79 percent of respondents say improving the balance sheet, compared with 15 percent who say increase capex and just 5 percent – a record low – who want money returned to shareholders. 

During the Covid-19 outbreak, companies have slashed payments to shareholders to protect balance sheets, as well as in response to calls from regulators. 

At the end of March, the European Banking Authority called for all banks in the European Union to suspend planned dividends and buybacks in order to maintain the industry’s ‘robust capitalization’. In the UK, banks and insurers have come under heavy pressure from the Bank of England to cancel dividends, with most agreeing.

Turning to the US market, between March 16 and April 5, 55 companies announced that they would suspend their dividend program, according to an analysis of SEC filings conducted for IR Magazine by Intelligize.