Investors have turned bearish in their outlook for the global economy and corporate earnings, according to the BofA Merrill Lynch Survey of Fund Managers published in July.
The survey shows a net 12 per cent of respondents predicting the global economy will deteriorate in the coming year, the first negative forecast since February 2009. This represents a big turnaround from June, when a net 24 per cent forecast the economy to strengthen. A net four per cent of the panel expected corporate profits to worsen in the coming year, compared with a net 28 per cent forecasting earnings growth just one month earlier.
A net one per cent also said that profit margins would fall in the coming year, compared with a net 31 per cent predicting improved margins in May.
Risk appetite has dipped with investors moving into cash and reducing exposure to cyclical stocks. Cash now comprises 4.4 per cent of an average portfolio, up from 4.1 per cent in May. A net 39 per cent of the panel is taking lower than normal risk, more than double the proportion in May. Allocations towards pharmaceuticals, a classic bear market sector, increased to the highest level since March 2009.
“July’s survey echoes the sentiment that investors expressed during the recession in early 2009,” said Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research.
Investors appear more concerned about the outlook for US equities than at any point since November 2006, with a net 14 per cent of the panel saying it is the region they would most like to “underweight”. At the same time, global emerging markets have been gaining in popularity while investors are also returning to the eurozone – in spite of weakened economic sentiment.
Respondents have also scaled back positions in global equities while moving into bonds over the past two months. The proportion of asset allocators “overweight” in equities has slipped to a net 11 per cent from 30 per cent in May. The proportion “underweight” in bonds has fallen to a net 15 per cent, down from 29 per cent in May. This is despite investors acknowledging that equities are increasingly undervalued and bonds increasingly overvalued. The spread in perceived valuations of bonds and equities is at its widest since 2003.
Risk aversion is not restricted to “long-only” investors. Hedge funds have reduced their net equity exposure to its lowest since March 2009.
As for inflation, concerns have eased as sharply as growth fears have risen. A net 12 per cent of investors predict inflation to fall in the coming year, a turnaround from June, when a net 12 per cent were forecasting higher inflation. As a result, investors are pushing back the date they expect next to see a rate hike in the US or eurozone.
Four out of 10 respondents ruled out any rate hike by the Federal Reserve before July 2011; only four per cent predicted an increase this year.