Ahead of tomorrow morning’s interest rate decision by the US Federal Reserve, and driven by growing fears about a Chinese recession, big global investors are hunkering down.
The September edition of the monthly investor survey from Bank of America Merrill Lynch showed cash levels back up to seven year highs, confidence down, fears about global growth and growing concerns that a recession in China will drag the global economy down.
Interestingly the big global and regional fund managers now expect the Fed to lift rates in the 4th quarter of this year, not tomorrow. (A total of 214 panelists with $US593 billion of assets under management participated in the survey from 4 September to 10 September 2015). Last month, more managers expected a third-quarter increase (at the meeting now under way of the Fed in Washington).
The survey’s fears were partly confirmed by the release last night of downgraded global economic growth data from the Organisation for Economic Co-operation and Development (OECD). It cut its global growth forecasts for this year and next, including trims to China and Japan.
"Global growth will remain subpar in 2015. Some strengthening in growth is expected in 2016, but doubts about future potential growth continue to build,” the OECD said overnight in Paris.
The OECD cut its 2015 global growth forecast to 3% from 3.1% in June and its 2016 forecast to 3.6% from 3.8%. It expects Chinese growth to slow to 6.7% this year and 6.5% next year after 7.4% in 2014.
The cautious outlook indicates the OECD sees a serious threat from wobbles in China’s economy and on its financial markets. But the OECD still said the US Federal reserve should lift rates at a gradual pace because of the strength of the US economy.
According to the Bank of America Merrill Lynch survey exposure to emerging market equities remained at a record low among big global and regional investors, while bonds and cash benefited from heightened risk aversion.
The threat of recession in China increases as biggest tail risk for investors, while concerns over a potential emerging markets debt crisis has risen sharply.
In fact a net 75% of respondents rated a Chinese recession or emerging market default as the biggest tail risks this month.
In response, managers are increasing their cash holdings and reducing allocations to higher-risk assets. Average cash holdings are back up to 2008’s financial crisis level of 5.5%, and up from 5.2% in August.
September’s survey also found the highest allocation to bonds since May 2013 with a net 50% underweight the asset class.
Investors’ risk appetite has evaporated: “equity overweights are down a net 24 percentage points in a month, while commodity shorts are extended,” the survey shows.
“Sentiment towards Global Emerging Markets sours further, with underweights at a record net 34 percent and aggressive underweights are at an all-time high. Hedge fund net exposure and perception of market liquidity conditions are both at the lowest level in three years. And Investors’ expectation of U.S. Fed rate rise has been postponed to Q4,” the survey showed.
“Investors were already positioned for lower growth in China and emerging markets, but their risk-off stance has intensified. Contrarians will be noting the aggressive underweight positioning in emerging markets,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
“European equities have been hurt by the risk-off trade, but they remain a favoured market,” according James Barty, head of European equity strategy.
