Every third fund manager sees recession in 12 months, says Bank of America

Investment managers are worried as they expect the global economy to slip into a recession within the next 12 months, reveals the latest survey by Bank of America Merrill Lynch (BAML).

About 34 per cent of investors believe a recession is likely in the next one year. This is the highest recession probability in eight years, according to the BAML survey.

Most global financial markets have witnessed turbulence in recent weeks with the US bond yield curve inverting. This term is used when long-term bond yields fall below short-term, a harbinger of recession. Bond yields in most other developed countries turned negative. Meanwhile, gold, considered to be a safe-haven investment, continues to soar to new highs. 

In contrast, commodity prices, including those of oil and copper — seen as a gauge for economic well-being — have gone south. 
 

The economists at BAML have not ruled out recession.

“And this time, we are worried. We now have a number of early indicators starting to signal heightened risk of recession. Our official model has the probability of a recession over the next 12 months only pegged at about 20 per cent. However, our subjective call based on the slew of data and events leads us to believe it is closer to a 1-in-3 chance,” wrote Michelle Meyer, US economist at BAML, in a note dated August 9.

The recession fears have hit sentiment towards emerging markets (EMs), perceived as risky bets. The US dollar has gained against most EM currencies, triggering flight of capital from the equities market.

In the past one month, the rupee has come off by nearly 4 per cent against the greenback to Rs 71.16. The benchmark Sensex and the Nifty have declined around 7 per cent since July with foreign portfolio investors (FPIs) pulling out $3.5 billion from the market.

Given the economic backdrop, most fund managers are overweight on asset classes that tend to do well when interest rates fall and corporate earnings are weak, reveals the survey. On the other hand, most are underweight on assets with positive correlation to growth and inflation. Cash, real estate investment trusts (Reits) and bonds are some of the biggest overweights while equities and EMs are among the underweights. 

However, in terms of equity allocation, EMs still remain the biggest overweight for global investors ahead of the US, the survey shows.

Most fund managers believe a trade war between the US and China remains the biggest tail risk. 

Many investors are of the view the central banks could do more, given the recessionary pressures with a fourth of the respondents saying fiscal policy remains too restrictive.

Global fiscal and monetary policy mix is the most hawkish since November 2016, according to the BAML survey. Despite bond yields coming off sharply, only 9 per cent see a rebound over the next 12 months.

The latest survey was conducted in the first week of August with 224 fund managers cumulatively overseeing assets worth $553 billion.