One year ago, global investors were a bullish lot: long Bitcoin, which hit $19,611 on Dec 19, global stocks and banks, and short bonds and defensives.

As 2018 draws to a close, they have turned bearish, according to the latest Bank of America Merrill Lynch global fund manager survey: long cash, the U.S. dollar and defensives, and short global stocks, tech and industrials.

“Investors are close to extreme bearishness,” Merrill’s chief investment strategist Michael Hartnett said Tuesday in a statement. “All eyes are on the Fed this week, and a dovish message could equal a bear market bounce.”

Merrill conducted the survey in early December among 243 panelists with $694 billion in assets under management.

The survey found that net 53% of fund managers expected global growth to weaken over the next 12 months, the worst outlook on the global economy since October 2008.

At the same time, only 9% of investors expected a global economic recession in 2019, down two percentage points from the November survey.

The December poll showed the third biggest decline in inflation expectations, down 33 points to net 37% expecting the global consumer price index to rise over the next year — a big reversal from the April peak of net 82%.

The new survey found the biggest ever one-month rotation into bonds, as investors’ allocation rose 23 points to net 35% underweight, the highest bond allocation since the June 2016 Brexit vote.

Fund managers’ average cash balance ticked up slightly to 4.8% in December from 4.7% last month.

The fund manager cash rule holds that when average cash balance rises above 4.5%, a contrarian buy signal is generated for equities; when the cash balance falls below 3.5%, a contrarian sell signal is generated.

Allocation to global equities fell 15 points to a two-year low of net 16% overweight. Here’s how equity allocations in different regions looked:

  • U.S.: down eight points from last month to net 6% overweight
  • Eurozone: down eight points, taking the region to underweight for the first time in two years
  • U.K.: down 12 points to net 39% underweight, the second biggest underweight on record, as the approaching Brexit deadline stokes renewed uncertainty
  • Emerging markets: up five points to net 18% overweight, marking the return as the preferred region among fund managers
  • Japan: up three points to net 12% overweight

In December, investors replaced Long FAANG (Facebook, Apple, Amazon, Netflix and Google’s parent Alphabet) + BAT (Baidu, Alibaba and Tencent) with long U.S. dollar as the most crowded trade, cited by 25%. The tech stocks, which had held the top spot since February, were cited by 20% of investors, and 19% mentioned short emerging markets.

A trade war remained top of mind for 37% of fund managers as the biggest tail risk. Eighteen percent said their biggest concern was quantitative tightening, and 16% cited a slowdown in China.

Forty-six percent of investors said they wanted corporates to use cash flow to improve balance sheets, the highest level since 2009; followed by 34% that preferred increased capital expenditure, the lowest level since 2012, and 13% that wanted cash returned to shareholders.

Net 46% of fund managers — the highest on record — said corporate balance sheets were overleveraged.

This month’s survey found the worst profits outlook in a decade, with net 47% of investors expecting global profits to deteriorate in the next 12 months. Last January, 39% of fund managers predicted global profits would improve.

Net 57% of survey respondents predicted that corporate margins would deteriorate in the next year, a six-year low.

Passive Investing and ETFs

Eighty-four percent of December’s survey participants responded to the fund manager poll’s new section on passive instruments and exchange-traded funds, 47% of which said they actively used ETFs within their portfolios.

Merrill reported that 20% (weighted average) of fund managers’ assets were allocated to ETFs. Twelve percent said they invested more than 41% of their portfolios in ETFs.

Eighty-four percent of investors reported that they used ETFs to gain equity market exposure, versus 5% for government bonds and 4% for corporate bonds.

Seventy-two percent used ETFs to passively track broad equity market indexes, up three points from November, according to Merrill. Smart beta and ESG/thematics trailed at 17% and 4% usage.