Fund managers have downgraded their outlook for the global economy over the next 12 months and are concerned that the Chinese economy is likely to continue to slow sharply according the latest BofA Merrill Lynch Fund Manager Survey for July.
That means that they’ve increased cash holdings to the highest level since the 2008 crisis, the bank said. But it’s not all bad news, with asset allocation to equities remaining unaffected by the changes. The survey also found fund managers have pushed the start of the Fed tightening cycle back to Q4 2015, rather than the September meeting.
Interestingly, and channelling Fundstrat’s Tom Lee who who believes recent risk aversion has triggered a buy signal, Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research said “Rising risk aversion and stretched cash levels provide a contrarian buy signal for risk assets in Q3”.
Here’s a summary of the main findings of the survey:
- Confidence in the global economy falls sharply: 42% of investors expect strengthening over next year, down from 55% a month ago.
- China heads concerns: net 62% expect economy to weaken in next 12 months, eight out of 10 see GDP below 6% by 2018.
- Cash levels soar to highest level since 2008 crisis – 5.5% of portfolios; gold judged undervalued for first time in five years.
- Increased pessimism on China led further weakness in assets linked to China: Commodity allocation drops to six-month low, and global emerging market equities stays as most unloved region with allocations at 16-month low.
- Bonds still seen as much more over-valued than equities and more at risk of volatility-driven crash; equity overweights rise to net 42%.
- US dollar bullishness strengthens despite postponing of expected US rate rise to Q4 2015 or later, replacing June consensus of Q3.
- Appetite to overweight European stocks rises although potential Eurozone breakdown now biggest “tail risk.”