Fund managers have been bearish on the global economy since the 2008 financial crisis. According to the Bank of America Merrill Lynch (BofA-ML) survey of fund managers for December, 53% of global fund managers expect global economic growth to weaken over the next 12 months.
As the chart above shows, this is the worst outlook on the global economy since October 2008. “Investors are close to extreme bearishness,” said Michael Hartnett, chief investment strategist, BofA-ML. “All eyes are on the Fed this week, and a dovish message could equal a bear market bounce.”
US markets have corrected sharply on the back of increasing worries about a global slowdown. The sentiment is captured well in the survey. In fact, concerns about the US-China trade war have led the International Monetary Fund (IMF) to cut its global growth forecast in October to 3.7% for both 2018 and 2019, down from 3.9% projected in July.
Unfortunately, there is a downside risk to the revised forecasts as well. A senior IMF official told Reuters that the fund could further cut its global growth forecasts in January.
BofA-ML also said that allocation to global equities fell to a two-year low. “Investors pour into bonds, with this month’s survey finding the biggest ever one-month rotation into the asset class; bond allocation rises 23ppt to net 35% underweight marking the highest bond allocation since the Brexit vote in June 2016.”
While the US-China trade war tops the list of biggest tail risks cited by investors for the seventh straight month, quantitative tightening and a slowdown in China are the other concerns.