Equities not the favoured class in Oct

Global fund managers remained bearish on equities as an asset class in October, with average cash levels rising to 5 per cent during the month from 4.7 per cent in September, reveals the latest Fund Manager Survey (FMS) from Bank of America Merrill Lynch (BOFAML). However, October’s cash level is much less than the 5.7 per cent level in June 2019, but a tad above the 10-year average of 4.6 per cent.

The October Global FMS, which was conducted from October 4–10, saw an overall total of 230 panellists with $620 billion worth of assets under management (AUM) participate.

Recession, according to the BOFAML survey, is still a top concern among fund managers, with 31 per cent of those surveyed seeing recession over the next 12 months versus 67 per cent who see this as unlikely. The possibility of the world economy entering into recession has been highlighted by other brokerages as well. Analysts at Jefferies, for instance, see the prospects of a downturn rising. The ISM Non-manufacturing PMI declined from 56.4 in August to 52.6 in September, the lowest level since August 2016, showed the data. Manufacturing PMI, on the other hand, also declined from 49.1 in August to a 10-year low of 47.8 in September.

“If the ISM Manufacturing PMI gave a false recession signal in 2015-16, it remains the case that last week’s downturn in the ISM Non-manufacturing PMI has made the chart look more negative from a growth perspective than was the case in 2016, suggesting that the prospects for a more clearcut downturn are rising,” wrote Christopher Wood, global head of equity strategy at Jefferies in his latest weekly note to investors, GREED & Fear.

According to BOFAML, trade war, monetary policy impotence, bond market bubble, and a credit event are some of the other ‘tail risks’ that the fund managers seem to be wary about. Eighteen per cent fund managers expect short-term rates to rise over 12 months, a strong reversal from September 2018, when 87 per cent expected higher short-term rates.

“Investors remain bearish, but we are seeing signs of green shoots. If concerns about the trade war and Brexit are unrealised, the sentiment is likely to improve, validating our bullish tactical views,” said Michael Hartnett, chief investment strategist at BOFAML. Despite the overall bearish sentiment among fund managers, allocation to global equities inched higher by 5 percentage points (ppt) from September 2019 to net 1 per cent overweight. However, allocation to US equities slipped 2 ppt to net 15 per cent overweight, making it still the most preferred region amongst FMS investors.

Global earnings per share expectation remained bearish, despite improving 10 ppt in October to net 35 per cent of investors saying they expect profits to deteriorate over the next year. According to the October survey, 43 per cent investors wanted corporates to spend cash on improving their balance sheets, while 39 per cent preferred they invest in capital expenditure. Only 14 per cent wanted corporates to return cash to shareholders.

Among sectors, investors remained most overweight consumer staples globally since May 2013 and most underweight materials since February 2016, highlighting a huge skew toward deflation versus inflation.

Despite bearish sentiment among fund managers, allocation to global equities inched higher by 5 percentage points from September 2019 to net 1 per cent overweight