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Fund Managers Fear Second Coronavirus Wave: BofA Survey

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Global fund managers polled by Bank of America Global Research in May remained in a bearish mood, with just 10% expecting a V-shaped recovery from the coronavirus shock and 25% a new bull market.

In contrast, 75% of investors said they expected a U- or W-shaped recovery, and 68% a bear market rally.

The survey was conducted May 7 to 14 among 223 panelists with $651 billion in assets under management.

Fund managers’ cash levels remained high at 5.7%, down slightly from 5.9% in April, which itself was the highest level since the 9/11 attacks.

According to the fund manager cash rule, 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’ cash allocation fell 10 percentage points month over month to net 44% overweight.

May survey participants said the biggest tail was a second wave of COVID-19, cited by 52%. Other concerns trailed: permanently high unemployment, 15%; European Union breakup, 11%; and systematic credit event, 8% — way down from 30% in April.

Investors’ global growth expectations shot up by 40 points in May to net 38% expecting global growth to strengthen over the next 12 months, the highest level since January 2018, according to BofA.

However, they did not expect the manufacturing Purchasing Managers’ Index to rise above 50 before November. The latest reading showed the PMI at 41.5.

Net 10% of fund managers expected a lower global Consumer Price Index in the next 12 months.

Seventy-seven percent of investors said they expected below-trend growth and inflation in the global economy over the next 12 months, up one point from April, while 11% thought the global economy would experience above-trend growth and below-trend inflation, up six points from April.

Asked which structural shifts would characterize the post-coronavirus world, 68% of fund managers said supply chain reshoring, or localization; 44% said protectionism; 42% pointed to higher and new forms of taxation; and 24% said debt exemptions for the private and public sectors.

Fund managers’ equity allocation rose 10 points month over month to net 16% underweight. Allocation to U.S. equities jumped nine points to net 24% overweight, the highest level since July 2015; the U.S. remained fund managers’ most-favored region.

In May, bond allocation jumped 15 points to net 13% underweight, a level unseen since July 2009, BofA said.

Long U.S. tech and growth stocks were the most-crowded trade in May, according to 60% of investors. BofA noted that the last time this many investors expected value to underperform growth was December 2007.

Fourteen percent of respondents said long cash was the most crowded trade, 10% said long gold and 7% cited long U.S. dollar.

— Check out Reasons to Be Wary About the Stock Market Recovery on ThinkAdvisor.