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Thirty-seven percent of investors in Bank of America Merrill Lynch’s May fund manager survey cited a trade war as the no. 1 tail risk — not surprising considering that the poll was conducted May 3 to 9.

On Friday, May 10, after threatening to do so days earlier, President Donald Trump increased tariffs on $200 billion of Chinese goods to 25% from 10%. On Monday, China retaliated with tariffs on $60 billion worth of goods, effective June 1. The trade talks are said to have come to a halt for now, though Trump has said a deal could come within a month.

In the fund manager survey, a China slowdown and U.S. politics rounded out investors’ top concerns, at 16% and 12%.

The survey sample comprised 250 panelists with $687 billion in assets under management.

Thirty-four percent of investors surveyed said they had taken out protection against a sharp fall in equity markets over the next three months, the highest level in survey history on an absolute and a net basis, Merrill reported.

The fund managers in the survey “are well-hedged but not positioned for a breakdown in trade talks,” Merrill’s chief investment strategist Michael Hartnett said in a statement. “Investors see little reason to ‘buy in May’ unless the 3Cs — credit, the consumer and China — quickly surprise to the upside.”

Fund managers’ global growth expectations held flat from the April survey, with net 5% of respondents expecting global growth to weaken over the next year. Two-thirds of the sample did not expect a global recession until the second half of 2020 or later.

Investors in the survey opined that U.S. equities would have to fall to as low as 2,305 on the S&P 500 before the Federal Reserve would cut the federal funds rate. (The index was at 2,849 in midday trading on Wednesday.)

Few investors said they were positioned for a sharp rally in interest rates. Seven out of 10 expected interest rates to be broadly range-bound over the next year, at between 2% and 3%. Only 4% of those surveyed expected yields to return to below 2%.

According to the May survey, investors’ global profit expectations continued to rebound, reaching a nine-month high after rising 15 percentage points from last month. Just net 1% of investors surveyed said they expected profits to deteriorate in the next 12 months.

The credit cycle remained the fund managers’ primary concern, with net 41% saying corporate balance sheets were overleveraged.

Forty-six percent of fund managers wanted corporates to delever, up three points from April. Thirty-four percent wanted to see increased capital expenditure, and 12% preferred returning cash to shareholders.

Survey participants’ average cash balance remained flat in May at 4.6% for the third consecutive month. Merrill said that the fund manager cash rule had now been in “buy” territory for the past 15 months.

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 in May lowered their allocation to global equities by six points to net 11% overweight. Emerging markets remained their preferred region, with net 34% overweight, while the U.K. continued to be their least favorite, with net 28% underweight.

Allocation to U.S. equities edged downward by two points to 2% overweight.

The May allocation to bonds stayed at a seven-year high of net 34% underweight, as dovish central banks and risk-off sentiment drove interest rates lower, according to Merrill.

Long U.S. tech was the most crowded trade in the May survey, cited by 35% of fund managers. European equities and long U.S. dollar followed, cited by 16% and 15%.

— Check out Is the China Trade War as Troubling as It Seems? on ThinkAdvisor.