Fund managers are anticipating a global market slowdown and are beginning the task of shifting their portfolios toward less risky assets, according to a new survey.
A record 85% of asset managers responding to the Bank of America Merrill Lynch October Fund Manager Survey said they think the global economy is in a late cycle, the bank said Oct. 16. That was 11% more than the prior high in December 2007.
In addition, 38% of survey respondents said they expect the global growth rate to decelerate, the worst outlook since November 2008, it said.
The survey comes after the International Monetary Fund warned at its fall meeting that it expected global growth to decline to 3.7% through the rest of 2018 and on into 2019.
Recent market volatility fueled by spikes in bond yields and declines in equities added to investor concerns. Though the major U.S. indexes recovered somewhat Oct. 16, that was after the S&P 500 Index and Nasdaq Composite Index fell by 7% since the beginning of October.
Meanwhile, the yield on the 10-year Treasury jumped to 3.231% on Oct. 5 before moderating to 3.16% by Oct. 16.
"There's a little bit of bloom coming off the optimism," said Arnim Holzer, macro strategist at EAB Investment Group, in an interview. "And I think that's to be expected because we've layered on the reality of the trade war" between the U.S. and China.
"The IMF is also recognizing they're seeing stress in emerging markets — not just in terms of business flows, but also in terms of financials," he said, pointing out that debt, especially China's debt, hampers global growth if the world's largest economy is forced to fight an all-out trade war at the same time as it is trying to diversify and expand its economy.
Asset managers are keeping an average cash balance of 5.1%, the BofA survey said, which is well above the 10-year average of 4.5%, indicating a bearish outlook.
But correlations among asset classes, such as bonds and equities, have yet to rise to a level where managers would find it hard to diversify against downside risks, Holzer said.
However, he noted that markets are beginning to see more correlation in longer bonds, such as 20-year Treasurys, to the stock market.
"That makes sense because when 10-year Treasurys are at 3% to 3.25%, maybe it's not such a bad thing to hold [longer-term bonds] because you're getting more than inflation," Holzer said.
"Investors are bearish on global growth," said Michael Hartnett, BofA Merrill Lynch chief investment strategist, in a statement accompanying the survey results, "but not bearish enough to signal anything but a short-term bounce in risk assets."