Allocation to equity by global fund managers saw the second largest drop ever in June (largest happened in August 2011). The pessimism, according to the survey findings, was driven by concerns over trade war/recession, monetary policy impotence and low strike prices for policy puts.
Cash levels with global fund managers moved up to 5.6 per cent from 4.6 per cent, witnessing their biggest jump since 2011 US debt ceiling crisis. Overall, there was a preference for bonds, cash, staples, utilities and a huge rotation away from equities, banks, Eurozone and technology, BofAML says.
“FMS investors expect the US federal Reserve (US Fed) to cut if S&P500 falls to 2,430 (weighted average) and US President Donald Trump to seek a comprehensive trade deal if the S&P500 slumps to 2,350 (weighted average), reflecting concern about policy impotence,” the BofAML report says.
The two-day US Fed meeting got underway on Tuesday, with most experts predicting a status quo amid the ongoing trade war.
"The escalation of the US-China trade war and the resulting turmoil in financial markets
has finally opened the Fed’s eyes that the hiking cycle is over and that the next move should be a rate cut. However, they may prefer to wait until after the G20 meeting before pulling the trigger," said Philip Marey, senior US strategist at Rabobank International in a recent report.
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Trade war, according to the BofAML survey findings, is the top 'tail risk' with 56 per cent of FMS investors agreeing to this. The strategy of going long US Treasuries has become the top crowded trade with fund managers suggesting that the US dollar's "overvaluation" is the highest since 2002.
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“FMS investors are overweight assets that outperform when interest rates and earnings fall and underweight those positive correlated to rising growth & inflation. 74 per cent FMS investors are bearish on both the growth and inflation outlook for the global economy over the next 12 months, up 11 percentage points (ppt) month-on-month (MoM) and 56ppt from August 2018, the most bearish on growth & inflation outlook since September 2016,” the BofAML report says.