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Fund managers have slashed their allocation to bonds to the lowest level in two decades as they fear the markets have moved into ‘late cycle’, according to the latest Bank of America Merrill Lynch fund manager survey.
The survey, which questioned nearly 200 fund managers at the beginning of February when stock markets were falling, revealed they were spooked by the declines in the UK and US markets that pushed up volatility and bond yields.
Equities and fixed income are both proving to be a concern for investors. Allocation to bonds has fallen, with a net 69% of managers 'underweight', the lowest allocation in the 20 years it has been surveyed. An inflation-induced bond crash sat high on the list of worries, with 45% of managers saying it was their biggest concern.
Fund managers started to move out of equities and into cash as fears persisted. Allocation to equities fell to a net 43% overweight from net 55%, the largest monthly decline in two years.
In a bid to reduce risk and cyclicality, managers rotated into cash, with the average cash balance moving up to 4.7% from 4.4% in January.
There was also a record one-month jump in the net percentage of investors indicating they had taken out protection against a sharp equity fall in the next three months, at net -30% in February from net -50% in January, indicating more managers believe a stock market crash is imminent.
The majority of managers – 70% - now believe the global economy is in the ‘late cycle’ stage, the highest level in 10 years.
Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, said the shift in sentiment among managers had nudged the analysts' contrarian bull and bear indicator, but not by enough to suggest markets were a 'buy'.
‘While this month’s survey shows that investors are holding on to more cash and allocating less to equities, neither trait moves the needle enough to give the all clear to buy the dip,’ he said.
It is not just inflation and bonds that mangers are worried about, they still remain concerned about the US Federal Reserve or European Central Bank making a policy mistake (18% of managers) and market structure (13%).
Nearly a quarter of managers are also negative about the state of corporate balance sheets. A record number - 24% - believe global corporate balance sheets are overleveraged and the net percentage that would like to see companies return cash to shareholders remains close to 2009 lows.
Eight out of 10 managers are also expecting global interest rates to rise over the next 12 months.