A Period of Weaker Growth Expected by Fund Managers

Investors believe that the global economy will slow significantly in the coming 12 months but will avoid dipping back into recession, according to BofA Merrill Lynch's Survey of Fund Managers.  

A net 13% of respondents to the global survey believe that the world economy is headed for a period of weaker growth. The represents a significant swing since July when a net 19% were confident the economy would improve. Investors’ forecast for corporate profits shows the biggest downwards swing in the survey’s history. A net 30% of respondents expect the profit outlook to deteriorate in the coming 12 months. In July, a net 11% forecast an improvement in profits.  However, a net 42% of investors still hold the view that a global recession is unlikely in the coming year. The survey included 244 panelists with $718 billion of assets under management, and took place from August 5 to 11, when world equities fell by 12.3%.

BofA Merrill Lynch found cash holdings have soared to their highest levels since the depths of the credit crisis as investors have moved out of equities, notably cyclical stocks. Cash balances have climbed close to their high of 5.5% in December 2008. Global investors hold an average of 5.2% of portfolios in cash, up from 4.1% in July. A net 30% are overweight cash compared with their benchmark. Both numbers are at their highest level since March 2009.

Asset allocators have scaled back equity positions faster than in any previous month in the survey’s history. A net two percent remain overweight equities, down from 35% in July. Asset allocators have also reduced their underweight positions in bonds and reduced holdings in commodities and alternative investments.

“Flows out of equities into cash have reached capitulation levels, especially in the U.S., but it’s significant that a revival in optimism towards China has survived the global correction,” said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research.

U.S. sentiment down sharply  

In its August Survey of Fund Managers, BofA Merrill Lynch found asset allocators have reduced their positions in the U.S. more aggressively than in any other region and at the sharpest rate the survey has ever recorded. Asset allocators responding to the global survey moved slightly underweight U.S. equities. One percent of the panel is underweight this month, compared with 23% overweight in July.

At the same time, U.S. fund managers have demonstrated a turnaround in economic sentiment. Fourteen percent of U.S. respondents believe their economy will weaken, in contrast to the 29% predicting a stronger economy in June.

More positive towards China  

Asset allocators have reduced their overweight position in global emerging market (GEM) equities. A net 27% of the global panel is overweight the region, down by 8 percentage points month on month. GEM fund managers are slightly less optimistic than a month ago, but the shift in sentiment is far less pronounced than their colleagues in the U.S. and Europe, according to BofA.   

Significant sale of cyclicals; gold overvalued (again)  

Global asset allocators have departed cyclical stocks en masse over the past month, the survey found. Allocations towards industrials suffered a negative 27 percentage point change from July to August. A net 16% of global allocators are underweight Industrials, compared with 11% overweight in July. The proportion of respondents overweight energy stocks declined to 14% from 27% a month ago. While a large majority of allocators remain underweight banks, the month-on-month swing in the sector was a modest 4 percentage points.

The move out of cyclical stocks reflects how three-quarters of investors this month identified business cycle risk as the number one risk to market stability – up from 42% in July.

Investors have taken the view once more that gold is overvalued. In July, the net percentage taking this view dipped to 17%. But with gold hitting new highs, 43% of August’s panel believes it is overvalued.