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Investors raise risk but worry about central bank “impotence”

RiskGlobal investors have added risk and reduced cash in their portfolios despite concern in recent months about trade wars and monetary policy.

According to the latest data from the Bank of America Meryl Lynch (BofAML), recent weeks have seen fund managers move into cyclical plays (equities, Europe, industrials, banks) and out of defensive ones (bonds, real estate investment trusts, utilities, staples).

Although pessimism over trade wars has waned, it still remains the main cause for concern. Yet fund managers are now becoming increasingly worried about monetary policy impotence, which climbed to second spot of the main sources of unease, the report shows.

“The dovish Fed and trade truce have caused investors to reduce cash and add risk,” said Michael Hartnett, BofAML’s chief investment strategist, “but their expectations of an earnings recession and debt deflation still dominate sentiment. The pain trade for the summer remains up in stocks and yields.”

The average cash balance has fallen from 5.6% to 5.2%, which is still above the ten-year average of 4.6%.

Fund managers were 41% overweight in cash in July, the survey found. This was a fall from June – a month when cash allocations saw the biggest jump since the US debt ceiling crisis eight years ago - but the July level was still above the long-term average allocation. 

Despite the geo-political and economic backdrop, global growth expectations in July have risen from June’s decade low. Around 30% of investors in the bank’s fund manager survey said they expected to see global growth weaken over the next year.

Only 1% of fund managers surveyed expected higher global inflation in the next year – the most bearish inflation outlook in seven years.

Around half of investors were concerned about corporate leverage, while 41% believe profits will deteriorate over the next year.

Allocations to global equities made up the ground lost from June’s dip, rising 31ppt to net 10% overweight.

In terms of regions, emerging markets continue to top the list with around 23% of respondents indicating they are overweight in the asset class. The US and Eurozone tied as second most favoured regions with net 9% overweight.

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