Optimism over global growth has continued to decline with a quarter (25 percent) of investors expecting a stronger economy in the next 12 months compared to 62 percent at the beginning of the year.
According to BofA Merrill Lynch September Fund Manager Survey, the share of investors taking out protection against a correction in equity markets saw the largest monthly increase in 14 months. Meanwhile, average cash balance continues to be a key element preventing a sell signal, falling to 4.8 percent in September, yet above the past 10-year average of 4.5 percent.
Over half of investors surveyed (54 percent) cite volatility as the most undervalued asset, followed by sterling (15 percent) and oil (10 percent). Net 23 percent of investors think the USD is undervalued, the highest level since December 2014, while net 81 percent of investors say the bond market is overvalued, the highest level in almost a year.
With regard to geopolitical risk, over a third (34 percent) of those surveyed indicated the biggest tail risk to markets in North Korea, followed by policy mistake by the Fed/ECB (21 percent) and Chinese credit tightening (15 percent). However, 54 percent of investors surveyed would be most surprised to see a recession during the next six months and net 30 percent would find an equity bubble to be the least surprising event.
Chief investment strategist, Michael Hartnett, commented: “Cash levels remain elevated, suggesting markets can remain in an Icarus upside mode for risk assets. Investors have shunned mean reversion and cut their expectations for much higher bond yields.”
European equity strategist, Ronan Carr, added that “overall sentiment on the Eurozone is becoming less euphoric, with headwinds from a strong Euro and investors’ EPS expectations showing less momentum”.
The September Global Fund Manager Survey was conducted from 1-7 September and a total of 214 panellists with $629 billion assets under management participated.