Investors across the globe are positioning themselves for a “summer of shocks”, a new survey shows. The Brexit referendum, fear of a Chinese default and concerns that loose monetary policy will fail to ignite the economy are among the key threats cited in the latest Bank of America Merrill Lynch Fund Manager Survey.
Nearly 71% of investors say Brexit is either “unlikely” or “not at all likely” but the big plunge in UK equity allocations this month suggests they have prepared for the worst, CNBC reported.
Brexit is seen as the biggest “tail risk” for fund managers across the globe taking part. The survey involving 168 participants with $505 billion assets under management found 27% of fund managers pointing to a default or devaluation in China as the biggest risk. Chinese growth expectations fell sharply to net 50% expecting a weaker economy, as compared to 22% last month.
Quantitative failure, the risk of central bank policy failing, is also considered a big risk by nearly 15% of those surveyed.
On the UK equity front, fund managers believe allocations have plunged to their lowest level since November 2008 while a net 20% of investors think sterling has hit the second most undervalued reading on record, citing it as a good opportunity for traders looking to sell UK volatility or buy upside optionality.
Cash Levels High
Fund manager survey cash levels have gone up from 5.4% to a high 5.5%, with only 12% taking “higher-than-normal” risk.
Meanwhile, 33% of managers expect the global economy to “get a little stronger” from a net 67% saying “get weaker” last month. This is the strongest response in a year. Adding to that, 44% of managers expect “slightly higher inflation” and the next rate hike from the US Federal Reserve is expected in the third quarter of 2016. Nearly 49% expect the Fed to hike twice over the next twelve months, while about 31% think there will be only one hike.
The majority of fund managers continue to remain underweight equities. While 44% are underweight resources, another 22% are seen underweight industrial. Only about 11% are overweight financials. The survey found no fund manager to underweight banks.
Markets
“An equal number of managers expect the equity market to be up or down over the next six months. Last month, a net 25% expected the market to be down in six months,” the survey says pointing to oil prices and the US dollar as the biggest driver for equities in the next six months. Oil is viewed as the least undervalued in 10 months.
On the currency front, a net 20% of investors think the yen is overvalued, which is the highest reading in nearly 19 months. While 12% think the US dollar is undervalued, another 17% think euro is overvalued.
Only about 5% of investors think global profits will deteriorate over the next 12 months. Given the anemic growth environment, a record 73% of investors think companies are currently under-investing in their businesses.
Figures in asset allocation see a decline with equity allocation falling to 6%, as compared to 9% last month and bonds dipping to 41% vs. 38% last month. However, a modest improvement can be seen in allocation to commodities.
China Slowdown
The Chinese government’s experiment with slowing the economy appears to have more bumps ahead, creating more chaos for the commodities markets.
New economic data released over the weekend shows that a hard landing for the command economy is still possible.
“Credit growth, industrial production, retail sales and fixed-asset investment data fell short of expectations reigniting fears the presumed recent stabilization in the Chinese economy may be short-lived,” wrote Lindsey Piegza, chief economist at Stifel Fixed Income, an asset management firm.
The mining and utilities sectors showed the biggest decline in growth, with manufacturing also slowing. Every sector continued to grow, though, just not as quickly. For example, steel production slowed to a growth rate of 2.5%, down 1.2 percentage points, but not stopping.
