Fund managers have become increasingly pessimistic towards the global economic outlook, helping to partially explain the savage sell-off in risk assets seen in recent weeks.
That’s the overwhelming view to come from Bank of America-Merrill Lynch’s latest global fund manager survey for January with concerns surrounding the outlook for China’s economy, unsurprisingly, weighing on sentiment during the month.
We’ve selected three charts from the report that help demonstrate the shift in sentiment seen over the past month.
The first reveals the deterioration in global growth expectations seen since the middle of 2015.
In December, only a net 8% of fund managers indicated that they expect global economic conditions to improve in the year ahead, the lowest level in four years and well below the 29% level seen in December.
This indicates that while the majority still believe conditions will improve, their numbers are declining. Despite the deterioration in sentiment, only 12% of respondents indicated that recession will occur in the next 12 months.
While a slim majority believe conditions will improve in the year ahead, doubts over whether this can continue over the medium to longer terms are clearly growing.
The second chart asked respondents where they believe the global economy currently sits within the economic cycle.
Ominously, those indicating that the global economy was now in the late stage of the economic cycle rose to the highest level seen since September 2008. Everyone, whether involved in markets or not, knows what happened after that date.
The majority now believe the improvement in the global economy is now closer to the end than the start, the first time this has been seen mid-2014.
The final chart helps explain why expectations deteriorated so sharply over the month – China.
45% of survey respondents suggested that a recession in China was now the biggest “tail risk” for the global economy, a significant increase on just one month earlier.
In what is a somewhat symbiotic relationship to the performance of the Chinese economy, 22% of respondents indicated that an emerging market debt crisis was the biggest risk to the global economy, again higher than levels seen in December.
While the survey is based off the responses of only 173 fund managers, the assets they manage total U$449 billion.
It’s an influential group, and in all probability a good indication of sentiment across the broader industry.
Given the sums they manage and the decline in sentiment, it’s little wonder markets have had a rocky start to the year.