Investors are increasingly circumspect on corporate profability and global growth in light of the recent oil price spike, according to the latest BofA Merrill Lynch survey of fund managers.

Close to a quarter (a net 24 per cent) now expect corporate operating margins to fall over the coming year, while as recently as January a net 10 per cent were expecting margins to swell – the sharpest decline in sentiment on this question since it was first asked in 2004.

Also down significantly is the percentage of fund managers who expect corporate profits to rise over the next 12 months: in February 51 per cent of respondents said they expected profit growth, but this month the figure slumped to 32 per cent. Additionally, 31 per cent of fund managers view consensus earnings estimates are too high.

Also falling from a net 51 per cent to 32 per cent month-over-month is the proportion of fund managers who believe the global economy will strengthen over the next year. The fall was most marked among US respondents (52 per cent in February to 21 per cent this month). Asia-ex Japan respondents were similarly negative, with a net 25 per cent expecting the region’s economy to weaken over the period.

The fear of stagflation appears to be increasingly rearing its head and is now the most commonly held view (out of four choices); some 38 per cent of those surveyed in March foresee below-trend growth and above-trend inflation – double January’s figure.

Turning to the fallout of the oil price spike, those surveyed are not expecting a commensurate hike in US interests to come any sooner, with 75 per cent of advisors predicting a rise in the next year. However, over the next 12 months over a third of fund managers see the yield curve as likely to flatten, the figure for February being 14 per cent.

The shift towards lower growth expectations and rising inflation and interest rates is causing cash levels to rise, notes Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research. However, the firm’s view is that this could be quite a fleeting trend if oil prices fall back as there has been no huge sell-off.  

While investors may be in “wait and see mode” they have nevertheless upped cash holdings in light of the uncertainty created by the recent unrest in the Middle East: globally, average cash balances were 4.1 per cent in March, up from 3.5 per cent in February.

With this upping of cash was a reduction in exposure to equities and commodities. The proportion of managers overweight equities this month was 45 per cent, falling from 67 per cent in February. With regards broader risk exposure, 8 per cent of those surveyed said they are taking on less risk than usual; in February just 1 per cent said this.

However, while trimmed exposure to equities and commodities might be expected to translate into an appetite for bonds, the net 59 per cent underweight reported by managers this month was barely lower than that in February.

Also remaining broadly similar to last month were managers’ sector allocations, with appetite for technology growth stories still strong, along with overweights towards cyclicals like basic materials and industrials prevailing. Underweights on traditional defensives like consumer staples also remained, but with pharmaceutical and healthcare stocks also returning to favour.

Appetite for US equities was hard hit this month, managers’ overweight falling from 34 per cent in February to 23 per cent. More strikingly, just 4 per cent of US survey participants expect firms in the US to up their EPS in the coming year – falling massively from 43 per cent the month before.

European investors’ faith in the automotive and personal household goods has clearly been shaken, with underweights on these sectors rising to a 20 and 30 per cent respectively.

Among other changes, the survey’s authors noted that recent scepticism on emerging markets seems to be reversing, in particular with regards to China. While last month 27 per cent predicted the Chinese economy to weaken in the next year, this month the figure was 15 per cent. Looking at the broader emerging markets, investors are neutral, said the firm; 43 per cent were overweight.