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US-China trade war, monetary policy among biggest concerns of fund managers, reveals BofAML survey

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Even as we continue to see major developments centering around the US-China dispute, concerns about a full blown trade war and and monetary policy impotence are among the biggest worries of fund managers, according to a survey. Bank of America Meryill Lynch's latest survey of fund managers noted that concerns about a trade war (36%), monetary policy impotence (22%), China slowdown (12%) and bond market bubble (9%) are the top four concerns cited by fund mangers. Amid the ongoing trade war, the Chinese economy grew by just 6.2% on-year in the June quarter, registering the lowest rate of GDP growth in the last 27 years, ie, since the first quarter of 1992. China’s Apr-Jun quarter GDP growth was slower than the previous quarter’s 6.4%. Steep decline in China’s growth is a result of the continued trade dispute with the US and alarming off-balance sheet borrowings by the local governments.

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Notably, there's a rising sentiment among the fund managers that the corporate earnings are going to decline in the future. "A record net 48% of investors are concerned about corporate leverage; global profit expectations remain flat at net 41% of those surveyed saying they expect profits to deteriorate in the next year," said the survey. Further, corporate payout ratios (including share buybacks) are too high, according to a record net 38% of fund managers. Interestingly, while the pessimism level had peaked in the previous month, the investors have taken on more risk in the current month. This month’s survey found that investors have added risk, rotating into cyclical plays (equities, Europe, industrials, banks) and out of defensive ones (bonds, REITs, utilities, staples).

Interestingly, the average cash balance fell to 5.2% from 5.6%, still above the 10-year average of 4.6 per cent. The allocation to global equities retraced almost all of the previous month’s dip, rising 31ppt to net 10% overweight. Looking at regional equity allocations, the US and Eurozone tie as the second most favored regions, both at net 9% overweight; Emerging markets continue to top the list, with net 23% of investors surveyed indicating they are overweight the asset class. "The dovish Fed and trade truce have caused investors to reduce cash and add risk. But their expectations of an earnings recession and debt deflation still dominate sentiment. The pain trade for the summer remains up in stocks and yields,” said Michael Hartnett, chief investment strategist at BofAML said.