So much has changed in the past year (at least according to respondents in Bank of America’s latest Fund Manager Survey).
This time in December 2017, FMS investors were super bullish and long Bitcoin (which hit $19,611 on Dec 19th 2017), global stocks, banks, and short bonds and defensives. One year later, everything has been flipped on its head: FMS investors are bearish, long cash, the US dollar, and defensives and are short global stocks, tech, industrials (oh and Bitcoin is trading around $3,000).
So what else does the latest fund manager survey (which polled a total of 243 respondents with $694bn AUM in the period Dec 7-13) reveal? Not surprisingly, the survey found close to “extreme bearishness” on Wall Street, with BofA’s Michael Hartnett noting that December saw the third biggest decline in inflation expectations, down 33ppt to just net 37% expecting global CPI to rise over the next year, a big reversal from the recent peak of net 82% in April.
As a result of this pre-deflationary deluge, investors have flooded into bonds and out of stocks, while within equities there were large moves into defensives via energy and tech into staples and utilities.
More importantly, this month’s survey found the biggest ever one-month rotation into bonds class as investors dumped equities around the globe while bond allocations rose 23ppt to net 35% underweight….
… marking the highest bond allocation since the Brexit vote in June 2016.
Meanwhile, the allocation to global equities has fallen 15ppt to a two-year low of net 16% overweight, with US equity allocation falling 8ppt to net 6% overweight, largely as a result of collapsing global GDP/EPS expectations in December…
… but cash level at 4.8% (from 4.7%) are not enough to trigger a contrarian “buy signal” for risk assets from BofAML Bull & Bear Indicator…now 2.5.
So what are the key highlights from the report?
On Macro:
While only 9% of investors surveyed expect a global economic recession in 2019, down 2ppt from last month…
… net 53% expect global growth to weaken over the next 12 months, the worst outlook on the global economy since Oct. 2008.
In addition to overall economic weakness, December also saw the third biggest drop in inflation expectations, down 33% to just net 37% expecting global CPI to rise over the next year, a big reversal from the recent peak of net 82% in April.
On Corporates
Stepping away from the macro, the Dec. survey found that the most preferred use of corporate cash flow amongst FMS investors is improving balance sheets (46%, highest since 2009), followed by increasing capex (34%, lowest since 2012) and returning cash to shareholders (13%) as suddenly everyone appears to be worried about soaring debt even as just two months ago the same fund managers currently surveyed would trip over each other to 5x oversubscribe any shitty covenant-lite loan.
And related to this, a net 46% of fund managers surveyed think corporate balance sheets are overleveraged, the highest on record. Which is also ironic because three months ago a record number of investors tripped over themselves to 5x oversubscribe cov-lite 6x lev loan deals.
Investor concern about corporate leverage (highest since since Oct’09) tracks equities vs. bonds performance closely and implies considerable downside for equities relative to bonds in the coming quarter.
And yet, FMS survey respondents – well known to contradict themselves repeatedly in the same survey – also said there will be no full-scale rotation from equities to bonds until 3.6% on US Treasury 10-year yield (averaged weighted response); 10bp lower than last month. Which is ironic in light of the top observation, namely that Dec saw the biggest monthly rotation into bonds on record.
Meanwhile, it’s not just the global economy and inflation expectations that are tumbling: this month’s survey also found the worst profits outlook in a decade, with net 47% of investors expecting global profits to deteriorate in the next 12 months
And related to this, a net 57% of those polled think corporate margins will deteriorate in the next year, a six-year low.
Finally, looking at the biggest risks, trade war (37%) once again tops the list of biggest tail risks cited by investors for the seventh straight month…
… followed by quantitative tightening (18%) and a slowdown in China (16%)
And while the sentiment presented above probably does not need a summary, according to BofA’s chief investment strategist, Michael Hartnett, “Investors are close to extreme bearishness,” adding that “all eyes are on the Fed this week, and a dovish message could equal a bear market bounce.”
Then again, if Powell goes further and is “bearish” by not hiking, which in turn triggers recession concern, the US dollar rally will continue, while a sell-off in rate-sensitives and cyclicals (watch RTY) would prompt US stocks to join global bear market with SPX flush to 2400.
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