Even as tensions continue to flare up amid US-China trade war, global fund managers are bracing for a steep fall in equities, according to a report. A Bank of America Merrill Lynch survey found that more than 33%of investors have secured downside protection against a sharp correction in the global equity market over the next three months. This is the highest level in the survey s history. Fears of a full blown trade war between the US and China continue to worry global investors. Investors are well-hedged but not positioned for a breakdown in trade talks Michael Hartnett, Chief Investment Strategist at BofA Merrill Lynch said. Notably, trade war (37%) tops the list of tail risks cited by investors for the 11th time in the past year, followed by a China slowdown (16%) and US politics (12%). According to Hartnett, the 3Cs –Credit, Consumer, and China have contributed to investor pessimism in the month of May. Investors see little reason to buy in May unless the 3Cs quickly surprise to the upside, he said.
Sharing the key macro expectations of investors Bank of America Meryill Lynch said that the investors anticipate global growth expectations to hold flat from last month. About 5% of investors are expecting global growth to weaken over the next year, while two-thirds of those surveyed do not expect a global recession until the second half of 2020 or later.
Interestingly, only a very small portion of investors are positioned for a sharp rally in interest rates, as 7 out of 10 expect interest rates to be broadly range-bound over the next year (between 2-3%), whereas only 4% of those surveyed expect below 2% yield.
Most investors are expecting profits to rebound to a 9-month high, with just about 1% of them saying they expect profits to deteriorate in the next 12 months. However, The credit cycle remains the primary concern of FMS investors, with net 41% saying they think corporate balance sheets are overleveraged. The percentage of fund managers polled who want corporates to delever rose 3ppt to 46%; 34% want to see increased capex, and 12% prefer returning cash to shareholders, said the report.