The Bank of America (BofA) Merrill Lynch July Fund Manager Survey finds investor sentiment bearish as growth and profit expectations take a clear plunge.
When asked their expectations for global profits, 9 percent of respondents indicate they do not expect an improvement in the next 12 months – the lowest level since February 2016. Eleven percent of those surveyed do not think corporate earnings will improve by 10 percent or more over the next year, a significant downward swing from 35 percent thinking they would in February 2018.
A trade war remains the biggest risk cited by respondents – 60 percent – with investor concern the highest since worries surrounding EU sovereign debt funding in July 2012. The top three worries are rounded out by a potential Federal Reserve/European Central Bank hawkish policy mistake (19 percent) and concerns about a euro debt crisis (6 percent).
Long Faang – Facebook, Apple, Amazon, Netflix and Google – plus Bat (Baidu, Alibaba, Tencent) remains the most popular trade identified by investors, at 53 percent, for the sixth straight month. It is also the most crowded trade outright since long US dollars in January 2017. The top three in July are rounded out by short emerging market equity (12 percent) and long oil (10 percent).
Allocation to tech has rebounded to 33 percent overweight, making it the most favored sector this month. Allocation to banks has collapsed to a mere 3 percent overweight, representing a 33 percentage-point drop in banks allocation over two months.
Global equity allocation has fallen to 19 percent overweight, the lowest level since November 2016. And this month’s survey finds notable shifts in regional equity allocations: allocation to US equities has leapt to 9 percent overweight, the highest since February 2017, having been 28 percent underweight in September 2017.
A large drop in eurozone equities allocation this month leaves allocation at 12 percent overweight, the lowest level since December 2016. Allocation to UK equities has increased for the fifth straight month to 18 percent underweight, its highest level since February 2016. And allocation to commodities remains near the eight-year high from last month, standing at 6 percent overweight.
In an indication of another trend that may emerge, 25 percent of those surveyed say oil is overvalued, the highest level since April 2012, when West Texas Intermediate averaged $103 per blue barrel.
A record 17 percent of respondents think gold is undervalued, while 18 percent of survey participants feel the Japanese yen is undervalued, down 11 percentage points from last month, and the cheapest valuation since October 2008.
‘Investor sentiment is bearish this month, with survey respondents eyeing the risks from a possible trade war,’ says Michael Hartnett, BofA Merrill Lynch chief investment strategist, in a statement. ‘Equity allocation has fallen notably while growth and profit expectations have slumped.’
