A new report from the Bank of America highlights that BofA Merrill Lynch Fund Manager Survey finds that investors are worried about monetary policy as expectations that the Fed will be increasing interest rates soon rise. The report also notes these worries about monetary policy and the future direction of the economy have also led investors to lose their risk appetite.
Sharp fall in fund manager sentiment in October
Representing a huge drop from 52% from September, only a net 32% of respondents anticipate the global economy to improve over the next year. Of note, this is the lowest reading in over two years.
In a related development, bot inflation and earnings expectations have slumped. Moreover, the growing belief that global economies will see both below-trend inflation and below-trend growth is even stronger in October at 77%.
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The BofA report highlights that monetary policy is behind a good bit of this shift in sentiment. Today only around 18% of fund managers view policy as too stimulative, down 14 percentage points from 32% in September, to the lowest level since August 2012. Moreover, perceptions of monetary risk have also increased significantly, along with concerns about emerging market risk.
Reducing risk appetite
According to the BofA survey, these macroeconomic concerns are leading investors to reduce riskier exposures. Cash balances are now up to almost 5%, investment horizons are shortening and equity overweights are down a n13 percentage points month-over-month). By the same token, underweights in commodities have also increased, while sectors sensitive to the asset class such as energy and materials are seeing significant moves to net underweight.
Survey respondents have lost their risk appetite for emerging markets and European equities. The BofA report notes both current positioning and intentions for the next four quarters have turned negative or neutral. Respondents have upped their exposure to U.S. markets and also increased their preference for Japan.
“Cash balances are high, but investors are retreating to benchmark positions rather than staging an exodus from markets,” pointed out Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
“With the European Central Bank ‘hope trade’ gone, performance in European equities is reverting to fundamentals. As our view remains downbeat, we continue to favor defensive dividend yield stocks and expect any rallies in cyclical stocks to be short-lived,” added Manish Kabra, BofA European equity and quantitative strategist.