Global fund managers are getting more worried about corporate debt, but despite that they still like shares – sort of.
The June fund manager survey from Bank of America Merrill Lynch (BAML) reveals that the proportion of managers worried about over-leveraged companies has hit a record 42%.
That’s a record, and well above the peak of 32% from the GFC a decade ago.
As well a net 34% think corporate balance sheets generally are over-leveraged, which is another all-time high.
Bank of America Merrill Lynch reckons this nervousness could be a downside risk for equities against government bonds.
And with the Fed due to lift interest rates Wednesday night the higher interest costs will add pressure to those balance sheets that are stretched, adding to the fears among fund managers.
But here’s the odd thing, despite these fears fund managers like US stocks, despite the rise in buyouts and big takeovers, and the possibility of more to come, especially in the media.
The June survey shows that global investors increased their allocations to US shares by 16 percentage points, making them overweight in US companies for the first time in 15 months.
And nearly two-thirds of respondents in the latest survey say the US is the best region for offering a return on profits.
“Investors have their eyes on the US this month,” said Michael Hartnett, BAML’s chief investment strategist.
If the US is back in the good books, alongside defensive stocks, banks, emerging markets and eurozone equities are on the outer.
Commodity allocations are at their highest in eight years, and tech share are still king.
The survey shows that for the fifth month in row, the most crowded trade (over popular) is to be long in FAANG+BAT (shares in Facebook, Amazon, Apple, Netflix, Google + Baidu, Alibaba, Tencent).
“June rotation shows investors are selling cyclical plays (such as) banks, emerging markets and euro zone equities in favour of defensive sectors and U.S. equities,” BAML said.
Investors still have their European equity overweight positions, but have cut allocations to 18-month lows, citing trade-war fears and slower growth.
Among European funds, the trade threat drove the biggest- ever drop in allocations to auto stocks in the history of the poll, reflecting growing anxiety about potential US tariffs on carmakers, the majority of which are listed in Europe.
Ahead of the Fed’s meeting yesterday and today, fund managers are confident in the central bank’s current interest rate policy, but think a fall in US inflation would be the most likely reason for the central bank to stop tightening.
They think the S&P 500 will peak at 3,040 (9% higher than present levels), and don’t expect a recession until the first half of 2020.
The survey was conducted in the first week of this month with responses from 235 fund managers with $US684 billion under management.