It’s not quite a case of big global investors heading for the mattresses but President Trump’s re-igniting of the trade war with China has certainly seen big investors exit many of their equity positions at the same time that a record level of insurance against price falls is being taken out.
In fact the latest Bank of America Merrill Lynch’s (BAML) monthly survey has found equity allocations among big global investors holding more than $A1 trillion of investments fell 6 percentage points in May and over a third of fund managers have taken out protection against sharp stock market falls in coming months damaging their portfolios.
A record 34% of investors had bought portfolio hedges, BAML said, adding that allocation to safe-haven cash had risen seven percentage points to a net 33% overweight.
The survey also showed that a global economic slowdown in the next 12 months is expected by 63%, so a lot of gloom. But by the same token, only 5% expect a recession in 2019, only 33% before the 2nd half of 2020.
The survey of funds managing close to $US687 billion was conducted May 3-9 just as Sino-US trade talks turned nasty.
The proportion of funds naming trade war as the biggest risk rose by 17 percentage points over last month, and latest developments appear to have vindicated their fears.
BAML said in the survey that the proportion of investors preparing for equity falls is the highest in the survey’s history.
The survey also noted that the trade war was seen as the main risk by 37% of participants, followed by a Chinese slowdown which was picked by 16%. (Yesterday’s economic data from China suggests the economy slowed noticeably in April – see separate report).
President Donald Trump on Friday carried out his threat to hike tariffs on an additional $US250 billion of Chinese goods. China’s decision on Monday to slap on tit-for-tat tariffs sent global equities into their worst one-day fall this year. Trump is now threatening more tariffs.
“(Investors) are well-hedged but not positioned for a breakdown in trade talks,” Michael Hartnett, chief investment strategist said in the report.
“Investors see little reason to ‘buy in May’ unless the 3Cs – credit, the consumer, and China – quickly surprise to the upside.”
The survey found the overall net equity overweight had dropped to just 11%, while a net 34% were underweight on bonds, the highest in seven years.
Surprisingly emerging markets were the most preferred equity class with a net 34% overweight, while the least favoured was the UK with a net 28% underweight.
The latter is the continuing Brexit confusion, the former is a surprise given that China is, in reality, an “emerging market and emerging markets also sell a lot of commodities to China.
US tech stocks are now the most crowded trade, displacing short European shares for the first time since November 2018.
The change came as eurozone equity allocations jumped nine percentage points to a 9% overweight – well off seven-year lows hit in January.
BAML said the “intention to own” European stocks had risen to the highest level since last May “amid greater economic confidence, despite heightened trade war risk.”
Allocation to commodities slumped 11 percentage points to a net 8% underweight.