Fund managers pessimistic on risks of global recession
The BofA Merrill Lynch Fund Manager Survey for September shows that the summer anomaly of high cash levels and high macro optimism has been corrected via sharp declines this month in global growth expectations (lowest since July 2012) and equity allocations (lowest since Sept 2012). "Unambiguous pessimism means risk assets riper for a rally (note investors don’t want a Fed hike today). If no rally, then markets ominously hinting 'recession' and/or 'default' imminent."
Citigroup, the US bank, this week said it sees a recession as "a high and rapidly rising risk," with a 40% probability of global real gross domestic product growth slowing to 2% or below by the middle of 2016 before recovering in late 2017, at the earliest.
Avoiding worldwide recession is estimated to be a 30% probability scenario, and a more severe recession or indeed a boom are estimated at around a 15% chance each.
"We consider China to be at high and rapidly rising risk of a cyclical hard landing," Willem Buiter, Citi chief economist, and his economist colleagues said in a report. "The reasons behind China's downturn and likely recession are familiar: rising excess capacity in a growing number of sectors, excessive leverage in the private sector and episodes of irrational exuberance in asset markets.
"This is the classical recipe for a recession in capitalist market economies. This time is unlikely to be different for China. Policy options to prevent a recession exist but are, in our view, unlikely to be exercised in time."
Buiter, native of The Netherlands is a former professor of economics at the London School of Economics and he is also a former member of the Bank of England's rate-setting Monetary Policy Committee.
“Investors were already positioned for lower growth in China and emerging markets, but their risk-off stance has intensified. Contrarians will be noting the aggressive underweight positioning in emerging markets,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
“European equities have been hurt by the risk-off trade, but they remain a favoured market,” said James Barty, head of European equity strategy.
Asset allocators cut stocks and commodities (to 2008 levels) to seek the alternatives of bonds (highest allocation since May'13) and cash levels rose back to 5.5%, equal to the 2008 highs. "Note also Hedge Fund gross asset exposure sank to lowest since June 2012."
Global growth outlook is poorest in over three years, but Europe remains strong: 12-month forward European economic growth and inflation expectations only slightly soften: net 62% still expect stronger growth and net 48% expect higher inflation. Europe remains the most attractive region to overweight on a 12-month view according to net 53% of global fund managers — almost 50% more than next best region.
Investors’ expectation of US Fed rate rise has been postponed to Q4.
An overall total of 214 panelists with US$593bn of assets under management participated in the survey from 4 September to 10 September 2015. A total of 178 managers, managing US$480bn, participated in the global survey. A total of 96 managers, managing US$204bn, participated in the regional surveys.
Pic above: Xi Jinping, China's president, "meets with the officials of the organizing group as well as representatives of the troops and artists that took part in the activities held to mark the 70th anniversary of the victory of Chinese People's War of Resistance against Japanese Aggression and the World Anti-Fascist War, in Beijing, 16 Sept, 2015," according to Xinhua, teh official news agency.