Global Investors Grow Fearful On Economic Outlook, Add To Cash

Tom Burroughes Group Editor 17 August 2011

Global Investors Grow Fearful On Economic Outlook, Add To Cash

The world’s fund managers fear that although the global economy will avoid recession over the next 12 months it will slow considerably, and have boosted their cash holdings, according to the monthly Bank of America Merrill Lynch poll for August.

A net 13 per cent of respondents say the world economy is headed for a period of weaker growth, contrasting with the picture in July, when a net 19 per cent were confident the economy would improve. Investors’ forecast for corporate profits shows the biggest downwards swing in the survey’s history: a net 30 per cent of the panel expects the profit outlook to deteriorate in the coming 12 months, while in July, a net 11 per cent forecast an improvement in profits.

Cash balances have climbed to an average of 5.2 per cent of all assets, close to the 5.5 per cent level seen in December 2008 as the credit crisis raged. A net 30 per cent are overweight cash compared with their benchmark. Both numbers are at their highest level since March 2009.

The souring of economic confidence coincides with the recent wrangles in the US Congress over the debt ceiling negotiation, and further fears of defaults in the eurozone. The willingness to hold more cash is all the more notable as returns on cash are typically very low or even negative at present, due to low interest rates and inflation pressures. Wealth managers have looked to so-called "real assets" such as property, gold, timber and art as a secure store of value. 

The survey found that a net 2 per cent of fund managers remained overweight equities, down from a net 35 per cent in July. Asset allocators have also reduced their underweight positions in bonds and reduced holdings in commodities and alternative investments.

“Flows out of equities into cash have reached capitulation levels, especially in the US, but it’s significant that a revival in optimism towards China has survived the global correction,” said Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research.

Asset allocators cut positions in the US more aggressively than in any other region and at the sharpest rate the survey has ever recorded, the survey found. Respondents moved slightly underweight US equities: a net 1 per cent of the panel is underweight this month, compared with a net 23 per cent overweight in July.

Funds also cut their overweight position in global emerging market equities. A net 27 per cent of the global panel is overweight these stocks, a fall of 8 percentage points from July.

As concerns about weak economic growth intensified, global asset allocators scurried out of cyclical stocks; allocations towards industrials suffered a negative 27 percentage point change from July to August.

A total of 244 panelists with $718 billion of assets under management participated in the survey from 5 to 11 August.

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