Average cash balance with funds has been steady at 4.9% globally, which is above the past 10-year average of 4.5%. BofA Merrill Lynch August Fund Manager Survey said that profit expectations as a result have turned lower due to high cash balances. Investors continue to favour banks, technology, pharma, insurance and industrials; while sectors that are avoided include utilities, telecoms, staples and energy. Only net 33% of investors think corporate profits will improve over the next 12 months, down 25 ppt from January and the lowest level since November 2015.
“Investors’ expectations of corporate profits have taken an ominous turn this year,” said Michael Hartnett, chief investment strategist. He added that it is a warning sign for equities over bonds, high yield over investment grade, and cyclical sectors over defensive ones. Further deterioration is likely to cause risk-off trades. For the second straight month, investors cite the top two biggest tail risks to the market to be a policy mistake by the Fed/ECB and a crash in global bond markets.
The impact of the Fed balance sheet reduction in 2017 will be a non-event, said 48% of investors and 31% think any decrease would be a risk-off event, pushing bond yields higher and equities lower. Concern over the impact of central bank tightening reflects investors’ views on inflation. Around 43% of those surveyed indicated they thought low inflation was structural.
The percentage of investors expecting a Goldilocks scenario of above-trend growth and below-trend inflation rose 6 ppt to 42%, a record high. Net 49% of investors surveyed would be most surprised to see a recession in the next 6 months and net 28% find an equity bubble to be the least surprising event. For the fourth straight month, Long Nasdaq has topped the list of what fund managers think the most crowded trade, followed this month by short USD and long Eurozone equities.