Fund managers have warned of ‘cracks’ appearing in the bull market as concerns over trade wars and inflation weigh.
The monthly fund manager survey from Bank of America Merrill Lynch reveals managers are starting to worry about a slowdown.
Nearly three-quarters, 74%, of managers surveyed said they believed the global economy was now in the late cycle, the highest percentage in the survey’s history.
The threat of a trade war has climbed to the top of concerns, with 30% of investors citing it as a worry as US president Donald Trump's tariffs on aluminium and steel imports are set to come into force tomorrow.
Another 23% of managers are concerned about inflation and 16% are worried about a slowdown in global growth. The survey registered the lowest global growth expectations since July 2016 and the highest inflation expectations since June 2004.
Expectations for faster global growth fell 19 percentage points to net 18% this month, the lowest level since the UK voted to leave the European Union.
Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, said: ‘Cracks in the bull case are starting to emerge, with fund managers citing concerns over trade, stagflation, and leverage.
‘Investors have yet to act on these fears however, as rates and earnings are keeping the bulls bullish.’
While there are fears of a slowdown, 58% of managers believe global earnings per share will grow more than 10% over the next 12 months and the net percentage of investors who would like to see companies improve their balance sheets is at its highest level in over eight years.
The survey showed managers remain ‘stubbornly’ long on global stocks, banks, and technology while they are short on bonds and defensives. Allocation to banks has climbed to the second highest level on record, with net 36% of investors indicating they are overweight the sector.
However, pessimism towards UK equities hit an all-time high, with a net 42% of managers reporting they were underweight the region. ‘The UK remains the consensus short among fund managers,’ said the survey.
In contrast, a net 26% are overweight Japanese equities and for the first time in 2009, the majority of managers do not expect the yen to depreciate over the next 12 months.
Allocations more generally are positioned for ‘higher rates and weaker US dollar’, said the survey, and the March rotation ‘shows investors reducing risk by increasing defensive allocations’.
Managers’ allocation to equities fell to a net 41% overweight from 43% but it is still above the long-term average. Allocation to bonds rose 5% to a net 64% underweight from a record low of 69% the month before.