Most Investors in 8 Years See Recession As they Slash Stocks

Leading investment managers worldwide are selling stocks and buying bonds, as they assign higher odds to a recession beginning in the next 12 months and expect interest rates to fall, according to the Aug. 2019 release of the monthly Bank of America Merrill Lynch Global Fund Manager Survey. “Trade war concerns send recession risk to an 8-year high,” writes Michael Hartnett, chief investment strategist at BofAML. “With global policy stimuli at a 2.5-year low, the onus is on the Fed, ECB and PBoC to restore animal spirits,” he adds.


Key Takeaways

  • Leading fund managers see growing risk of recession ahead.
  • They are shifting portfolio allocations from stocks to bonds.
  • However, they also worry about excessive debt.
  • Trade is the biggest risk for the economy and the markets by far.


Significance For Investors

The survey was conducted from Aug. 2 to Aug. 8, and drew responses from 224 fund managers globally who collectively have $553 billion in assets under management (AUM). According to 34% of respondents, a recession is likely to start in the next 12 months, the highest percentage holding this view since Oct. 2011.


Meanwhile, 43% expect short term interest rates to head lower over the next 12 months, and only 9% predict that long term rates will go higher. This represents the most bullish outlook on bonds recorded by the survey since Nov. 2008.


Allocation to bonds rose by 12 percentage points since the July survey. While a net 22% of respondents now say that they are underweight in bonds, this nonetheless is their highest allocation to fixed income since Sept. 2011. 


Meanwhile, allocation to global equities dropped by 22 percentage points to a net 12% underweight, giving up almost the entire increase in equity allocations reported in the July survey. On a regional basis, emerging market stocks remain the most favored, but fund managers have trimmed their allocations, though they still remain overweight. U.S. stocks come in second, only slightly overweight, and are the most preferred region going forward. Eurozone equities, however, were the big loser, as fund managers shifted from a net overweight to a net underweight position, partly on concerns that the euro may be overvalued.


Despite the rush to bonds, a record net 50% of fund managers are worried about corporate leverage. Indeed, 46% believe that that primary use of cash flow should be to retire debt.


Morgan Stanley asserts that “we have been in a cyclical bear market since early 2018,” per their current Weekly Warm-Up report. Since Jan. 2018, they note, the S&P 500 Index (SPX) is virtually unchanged, while most other major stock indices in the U.S. and across the world are down significantly, as well as most U.S. stocks. They also believe that rising U.S. labor costs are “a bigger risk to the economic expansion than trade.”



Looking Ahead

When asked to identify the biggest tail risk for the markets, 51% of respondents to the BofAML survey chose the ongoing trade war. In second place, at 15%, was the possibility that monetary policy may prove to be ineffective. Tied for third and fourth places, at 9% each, were an economic slowdown in China and a bond market bubble.


Indeed, economists at Goldman Sachs warn that the escalating trade war between the U.S. and China is having a bigger negative impact on the U.S. economy than previously expected, raising the risks of a recession, Barron’s reports. Goldman believes that a trade deal is unlikely to be finalized before the 2020 U.S. presidential election.


As for the most crowded and thus riskiest trades, 32% of the fund managers surveyed by BofAML picked long term U.S. Treasury bonds, 19% said U.S. tech stocks, 15% said growth stocks, and 12% chose intermediate grade corporate bonds.