A survey published by Bank of America Merril Lynch on Tuesday has revealed key insights into the minds of global money managers.
The survey measures responses from approximately 200 institutional, mutual and hedge fund managers around the world. After a solid rally in the stock market, the greatest threat to the ongoing health of the market is revealed to be the economic slowdown in China.
30% of fund managers consider the ongoing slowdown in China to be the primary risk to their portfolios. The Chinese economy tops the list for the first time in over two years, and is, as such, an increasingly important metric to keep an eye on. Negative activity in China is likely to have a greater impact on the US and international stock markets.
Significant divergence between the S&P 500 and the Dow Jones Transportation Index
& Add This:
**FedEx down -4% after the close (FDX is over 10% of the index)
Q3 EPS $3.03 vs $3.10 est
Rev $17.0B vs $17.6B est pic.twitter.com/L6tG289vsL
— Bear Traps Report (@BearTrapsReport) March 19, 2019
Trade War Rages On
Been saying since August despite all the jingoism to the contrary, China is in the driver's seat in this trade war. Always has been. Recent trade negotiations and perpetual delays just reinforce that belief. Now China backing off on prior commitments. QED pic.twitter.com/lTZMhZdUpQ
— David Brady, CFA (@GlobalProTrader) March 19, 2019
The trade war is, unsurprisingly, second on the list, solidifying the role of the influence China has in the international marketplace.
After topping out at 60% in July 2018, 19% of fund managers still list the trade war as their main concern when it comes to risk assessment towards their portfolios.
The DOW rally actually came under threat even as it was happening on Tuesday, a direct result of uncertainty over US-Chinese trade agreements. The DOW dropped 100 points following a report that Chinese officials had backtracked on major concessions made during the ongoing negotiations.
Among the concerns were the hints that China may cancel orders for US aircraft, in breach of what had tentatively been agreed so far.
Fed Policy Behind Rally
The survey confirms the widely-held belief that the DOW rally is supported by the relaxed monetary policy introduced by the Federal Reserve. The US central bank has pledged to take a “cautious” approach to introducing any future interest rate hikes. Central bank chairman Jerome Powell also stated that the balance sheet runoff policy was not set in stone and that quantative easing may be reintroduced if necessary, easing concerns that the staggering $40 billion monthly runoff would impact the economy.
The number of survey respondents stated that liquidity conditions are positive has improved, and only 3% of fund respondents are overweight equities, the lowest level since 2016.
There is simply no “greed” to sell in equities.
Bearish on Inflation
59% of fund managers are bearish on growth and inflation outlook for the next 12 months, the highest figures since October 2016. 40% of investors are overweight in emerging markets, the highest level since April 2018. Fund managers have also cited this as the main area they would like to invest in over the coming 12 months.
This makes emerging markets the clear favorite among investors.
Credit Crunch Could Impact Stocks
With China taking the two top spots on the list of threats, the third spot, at 10%, was a potential credit crunch.
The trillions of dollars in debt racked up by corporate America loom over the economy, and one in ten fund managers see this as more dangerous than the trade war or any potential recession.
Of course, all the factors are interconnected. Slowing global production is viewed as a late stage of credit deflation, and the economic slowdown coupled with poor performance in international manufacturing indicates that a credit crunch could already be well underway.