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Investors Spooked by China but Not Yet ‘Max Bearish’: Merrill Poll

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With news about China’s slowing economy making daily headlines, investors’ confidence in the global economic outlook has grown significantly more pessimistic, according to Bank of America Merrill Lynch’s latest fund manager survey, released Wednesday.

Allocations to equities have plummeted, and cash holdings have risen, the survey found.

An total of 211 panelists managing $610 billion of assets took part in the survey from Jan. 8 to Jan. 14.

The poll found that a net 8% of fund managers thought the global economy would strengthen over the next 12 months, down from 29% in December — the survey’s lowest reading on this measure since 2012.

Even so, only 12% of panelists expected a global recession in the next 12 months.

Investors have not yet become “max bearish,” Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, said in a statement.

“They have yet to accept that we are already well into a normal, cyclical recession/bear market.”

Survey respondents’ risk aversion continued to increase, however. Average cash balances rose to 5.4% in January, the third-highest reading since 2009, from 5.2% in December and 4.9% in November.

A net 38% of investors are now overweight cash, versus a net 20% last month.

Bond underweights retreated from net 64% last month to 47% in January.

A slowdown in China was on investors’ minds, as 45% now considered this the biggest “tail risk” by far. Twenty-two percent worried about emerging market debt, and 14% about geopolitics.

Net overweights in equities in January halved to 21% from December’s net 42%.

Europe and Japan remained the most favored stock markets, although both experienced slippage in January: Eurozone equities from 55% overweight to 51%, and Japanese equities from 37% overweight to 31%.

“Investors’ bullishness towards Europe remains intact, but conviction is rooted to the floor,” James Barty, Merrill’s head of European equity strategy, said in the statement.

“The positioning gap between the most and least preferred sectors is the lowest in two years.”

Allocation to U.S. equities in January improved to net 15% underweight from net 19% underweight last month.

Bearishness toward global emerging markets equities increased this month, going from 27% underweight in December to 33%.

The survey found that more respondents thought global profits would decline over the next 12 months than increase, the first negative reading since October 2012.

Some two-thirds of respondents said they expected no more than two rate hikes by the Federal Reserve in the next 12 months, up from 40% a month ago.

Long U.S. dollar remains the most crowded trade, but the number of greenback bulls dropped to a net 44% in January from a high of net 87% in November 2014.

— Check out Are We Headed for Recession? on ThinkAdvisor.


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