Market shake-up raises investors’ fears over deeper downturn

The vast majority of fund managers think markets are in “late cycle” territory, according to Bank of America Merrill Lynch’s latest survey, which suggested growing numbers of investors are retreating out of riskier assets and hoarding cash after last week’s stock market ructions.

BAML’s February Global Fund Manager Survey, which was carried out in the midst of last week’s equity sell-off, showed 70 per cent of respondents think the global economy is in the “late cycle” period that typically precedes a downturn, the highest proportion since January 2008.

That said, most remained confident the good times will last some time longer, with 91 per cent of investors saying an imminent recession is “unlikely” and betting on pro-cyclical stocks such as banks and energy groups.

The proportion of funds assigned to equities dropped sharply, while bond allocations were cut to their lowest level since 1998.

Survey respondents thought the most “crowded” trades were investors shorting the US dollar and betting on further rallies in major US and Chinese tech stocks.

There were some signs of discomfort with high levels of borrowing by companies, with nearly a quarter of the surveyed investors saying that global corporate balance sheets are overleveraged.

But the lurking risks cited most by the fretting investors were a crash in bonds caused by inflation, a “policy mistake” by the Federal Reserve or European Central Bank, and “market structure”.

Michael Hartnett, BAML’s chief investment strategist, said that the investors surveyed were “holding on to more cash and allocating less to equities,” but that “neither trait moves the needle enough to give the all-clear to buy the dip.” Reported portfolio cash balances had inched up from 4.4 per cent in January to 4.7 per cent.

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