Last week , in the aftermath of the latest disappointing Chinese data, we noted that after closely tracking the recent surge in the S&P, the popular Citi Macro Surprise index slumped as numerous global growth indicators suddenly missed expectations and/or declined outright.
It appears that this troubling development was not lost on Wall Street, because according to the respondents of the latest monthly Global Fund Manager Survey conducted by Bank of America in which 176 participants with $514bn AUM answer various macro and micro questions, expectations for faster global growth tumbled by half, or a whopping 19%, to net 18% in March, the lowest level since the UK voted to leave the EU in June 2016, and suggesting that the global macro impulse has now faded.
And while the global economy may not be seen as in recession just yet, it's almost there: no less than 74% of investors surveyed now believe the global economy is in the late cycle: this was the highest percentage in survey history, while at the same time respondents voiced the highest inflation expectations in over 13 years. As a reminder, global growth turns south coupled with inflation you get "stagflation", and when as a result the "late cycle" economy end, recession begins.
Looking at this unexpected spike in pessimism, BofA's Chief Investment Strategist, Michael Hartnett, who conducts the monthly survey writes that this month's FMS "shows cracks in the bull case emerging, specifically concerns over
- a) trade…FMS tail risk #1 now trade war,
- b) stagflation…lowest global growth expectations since Jul'16, highest inflation expectations since June'04, and
- c) leverage…investor desire for cash flow to improve corporate balance sheets highest since Jun'10.
More from Hartnett, who warns that “cracks in the bull case are starting to emerge, with fund managers citing concerns over trade, stagflation and leverage."
So has this perceived slowdown in the global economy, which has yet to manifest itself in a change to rate hike expectations by either the market or the Fed, are the same fund manager respondents taking appropriate action and derisking?
Well, recall that this particular survey is the one we dub "endlessly paradoxical", and this month was no different, because even as the "smart money" sees both a stagflation and recession as just around the corner, they put in even more cash into the market. Indeed, as Hartnett notes, "ominously investors yet to act on fears, as rates and earnings are keeping the bulls bullish: FMS shows investors stubbornly long global stocks, banks, tech, still short bonds, defensives, and cash levels fell from 4.7% to 4.6%."
In other words, everyone is nervous and... not only not doing anything about it, but adding even more risk exposure!
To be sure this glaring disconnect between what Wall Street thinks and how it invests is something we have repeatedly commented, and is most likely just an indication of how broken the market has become thanks to constant central bank intervention.
And while Wall Street may be suddenly fearing a sharp economic slowdown, what do they think in terms of actual risks catalysts? The answer: the threat of a trade war (30%) returns to the top of list of tail risks most commonly cited by investors for the first time since January 2017, followed by inflation (23%) and a slowdown in global growth (16%).
This is the first time Trade War has emerged as the top risk according to Wall Street, and follows last month's top risk of inflation and bond crash.
Another notable finding, and the reason why yesterday's tech dump spooked so many: according to Wall Street, “Long FAANG+BAT” remains the most crowded trade (38%) - which we confirmed recently when looking at hegde fund 13F filings; "Short USD” is now the second most crowded trade (17%), while “Short Volatility” slips to sixth from first in January.
This is the second consecutive month in which "Long FAANG+BAT” is seen as the most crowded trade, and explains why should a selloff begin in earnest, it could get very messy, as investors will scramble to frontrun each other in getting out of the biggest "hedge fund hotel" position in recent history.
Finally, for all those asking what Wall Street believes will be the "magic level" in the 10Y which sends stock tumbling, the answer - according to the survey - is 3.60%
And here are the other key findings from the latest survey:
- 58% of investors surveyed believe global EPS will grow more than 10% in the next 12 months
- The net percentage of investors who would like to see companies improve their balance sheets is at the highest level in over 8 years
- Fund managers are stubbornly long global stocks, banks, and tech, while remaining short bonds and defensives
- Investors are reducing risk by increasing allocations to defensives such as staples, REITS, the U.S. and banks; they are rotating out of cyclicals and value plays including energy, discretionary, materials and the UK
- Allocation to banks climbed to the second highest level on record, with net 36% of investors surveyed indicating they are overweight the sector
- Pessimism toward UK equities hits an all-time high as net 42% of investors surveyed say they are underweight the region
- On Japan, global investors are still overweight Japan equities (net 26%) and, for the first time since 2009, the majority of fund managers do not expect the Japanese yen to depreciate over the next 12 months