Investors bracing for a steep fall in global stocks; here’s how they’re preparing for it

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Updated: May 15, 2019 1:00:11 PM

Even as tensions continue to flare up amid US-China trade war, global fund managers are bracing for a ‘steep fall’ in equities. We take a look at their top three concerns.

FPIs, foreign investors, pulled out money, stock market, capital market, US-China trade tensions, political uncertainty, election results, equity, debtBofAML survey found that more than 33%of investors have secured downside protection against a sharp correction in the global equity market over the next three months.

Even as tensions continue to flare up amid US-China trade war, global fund managers are bracing for a ‘steep fall’ in equities, according to a report. A Bank of America Merrill Lynch  survey found that more than 33%of investors have secured downside protection against a sharp correction in the global equity market over the next three months. This is the highest level in the survey’s history. Fears of a full blown trade war between the US and China continue to worry global investors. “Investors are well-hedged but not positioned for a breakdown in trade talks”  Michael Hartnett, Chief Investment Strategist at BofA Merrill Lynch said. Notably, trade war (37%) tops the list of tail risks cited by investors for the 11th time in the past year, followed by a China slowdown (16%) and US politics (12%). According to Hartnett, the 3Cs –Credit, Consumer, and China – have contributed to investor pessimism in the  month of May. “Investors see little reason to ‘buy in May’ unless the 3Cs – quickly surprise to the upside,” he said.

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Sharing the key macro expectations of investors’ Bank of America Meryill Lynch said that the investors anticipate global growth expectations to hold flat from last month. About 5% of investors are expecting global growth to weaken over the next year, while two-thirds of those surveyed do not expect a global recession until the second half of 2020 or later.

Interestingly, only a very small portion of investors are positioned for a sharp rally in interest rates, as 7 out of 10 expect interest rates to be broadly range-bound over the next year (between 2-3%), whereas only 4% of those surveyed expect below 2% yield.

Most investors are expecting profits to rebound to a 9-month high, with just about 1% of them saying they expect profits to deteriorate in the next 12 months. However,  The credit cycle remains the primary concern of FMS investors, with net 41% saying they think corporate balance sheets are overleveraged. “The percentage of fund managers polled who want corporates to delever rose 3ppt to 46%; 34% want to see increased capex, and 12% prefer returning cash to shareholders,” said the report.

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