“Investors remain bearish, with growth and profit expectations plummeting this month,” Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, said in a statement on the release of Merrill’s January fund manager survey.
“Even so, their diagnosis is secular stagnation, not a recession, as fund managers are pricing in a dovish Fed and steeper yield curve.”
Merrill conducted the latest survey in early January among 234 panelists with a total of $645 billion in assets under management.
Investors’ expectations for global GDP growth continued to fall in January, as net 60% of survey participants thought global growth would weaken over the next 12 months. This was seven percentage points more than in the December survey and the worst outlook on the global economy since July 2008.
Even so, only 14% of fund managers said they expected a global economic recession this year; instead, they were calling for secular stagnation in the next two to three quarters.
Net 19% of those surveyed said they expected the global consumer price index to rise over the next year, down 51 points from December. This was the second biggest two-month drop in inflation expectations on record, according to Merrill, and a massive reversal from the recent peak of net 82% in April.
Investors’ average cash balance ticked up slightly in January to 4.9% from 4.8% last month. The fund manager cash rule has now been in “buy” territory for 10 months.
The 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.
The January survey found that investors’ worries about the credit cycle continued to climb, as net 48% of fund managers considered corporate balance sheets overleveraged.
Merrill said that for the first time since 2009, corporate leverage was fund managers’ biggest concern. Half of survey participants said corporates should use cash to improve balance sheets, while 39% said they should increase capital expenditures and 15% return cash.