Trade war fears prompt equities cull

Fund managers have slashed their global equity allocations to the lowest level since November 2016, spooked by fears of a trade war.



The latest Bank of America Merrill Lynch (BofAML) survey, for July, revealed global equity allocations fell 14 percentage points to a net 19% overweight.

Over the past month managers were particularly bearish on emerging market equities which faced its largest monthly drop in two years, down 23 percentage points to 1% underweight.

Elsewhere, eurozone equities allocation suffered a drop of eight percentage points to 12% overweight, the lowest level since December 2016.

Biggest fears

A trade war was cited by 60% of respondents as the “biggest tail risk”. This is the biggest perceived tail risk since July 2012 when managers were concerned by the uncertainty surrounding EU sovereign debt funding.

The next largest fears were a Fed/ECB hawkish policy mistake (19%) and a euro/emerging markets debt crisis (6%).

Approximately 9% of respondents in the survey said they do not expect an improvement in global profits over the next 12 months, down 53 percentage points from the beginning of the year and the lowest level since February 2016.

Michael Hartnett, chief investment strategist at BofAML, said: “Investor sentiment is bearish this month, with survey respondents eyeing the risks from a possible trade war.

“Equity allocation has fallen notably while growth and profit expectations have slumped.”

Faith in US remains

The survey revealed allocation to US equities leaped eight percentage points to 9% overweight, the highest since February 2017, having been 28% net underweight in September 2017.

This builds on momentum expressed in last month’s survey which showed US equities climbed 16 percentage points.

Allocation to UK equities also increased three percentage points and for the fifth straight month to net 18% underweight, its highest level since February 2016.


A record 17% of respondents argued gold is undervalued, while 25% said oil is overvalued.

Earlier this week, investment management group Tilney announced it halved its exposure to physical gold in favour of short-dated US treasury inflation-protected securities (TIPS) across its central strategies.

Ben Seager-Scott, chief investment strategist at Tilney, said:“ The gold trade, which we initiated at the end of 2015, has served portfolios well, especially as we moved through a period where markets have been driven more by liquidity than fundamentals.

“With the investment landscape changing, it seems appropriate to review these positions, and begin taking profits. The gold positions effectively substituted for distorted fixed income markets which are now close to normalising in the US.”

Tech wins

The BoAML survey revealed that allocation to tech rebounded 10 percentage points at 33% overweight, making it the most favoured sector this month.

However, allocation to banks collapsed 17 percentage points to 3% overweight, resulting in a 33-percentage point drop in allocation to banks over two months.

Additionally, while the average cash balance dipped to 4.7% in July from 4.8% in June, it still remained above the 10-year average of 4.5%.


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