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Fund Managers Are Positioned for Secular Stagnation: Merrill

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Investors’ global growth expectations continued to rebound in April, according to the latest Bank of America Merrill Lynch fund managers survey, with net 5% of participants expecting global growth to weaken over the next year, a 20 percentage point improvement from the March survey.

At the same time, two-thirds of investors surveyed were bearish on both the growth and inflation outlook for the global economy over the next 12 months, the highest level since October 2016, further confirming the return of secular stagnation as their consensus view, Merrill said.

A global economic recession is not on the horizon, according to survey participants, as only 6% said they expected one this year. Seven out of 10 said they did not anticipate a recession until the second half of 2020 or beyond.

The inversion of the U.S. Treasury yield curve does not signal an impending recession, according to 86% of respondents.

Fifty-three percent of investors said the Federal Reserve was done hiking interest rates during the current cycle, up 15 points from last month. Only net 13% of fund managers said they expected higher global short-term rates, the lowest level since 2012.

“FMS investors added a bit of cyclical risk this month but are still firmly positioned for secular stagnation,” Michael Hartnett, Merrill’s chief investment strategist, said in a statement. “They are long assets that outperform when growth and rates fall, like cash, EM and utilities, while short assets that require higher growth and rates, such as equities, the Eurozone and banks.”

The survey, conducted in early April, comprised 239 panelists with $664 billion in assets under management.

In April, fund managers’ average cash balance again clocked in at 4.6%. Merrill noted that the fund manager cash rule has now been in “buy” territory for more than a year.

This 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.

Investors’ allocation to global equities shot up 14 points from March to net 17% overweight, the largest increase since December 2016. Emerging markets remained investors’ favorite regional allocation, with net 34% of fund managers overweight.

Allocation to U.S. equities ticked up four points to 4% overweight, while European equities allocation jumped eight points to net neutral. The U.K. continued to be the least favored region, with net 28% of equity investors underweight.

Investors in the April survey again considered a trade war and a slowdown in China as the biggest tail risks, with the former just edging the latter at about 20% each. Eighteen percent said monetary policy impotence was the biggest tail risk.

For the second consecutive month, short European equities was the most crowded trade, according to 25% of investors, while 18% cited long FAANG (Facebook, Apple, Amazon, Netflix and Google’s parent Alphabet) + BAT (Baidu, Alibaba and Tencent), 17% to long U.S. dollar (17%) and 16% long U.S. Treasuries.

— Check out Jumpy Investors Continue to Flee Stocks: Merrill on ThinkAdvisor.


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