Driving the bearishness over the global economy was primarily the ongoing trade war between the US and China.
Expectations for the global economy are at their lowest level since November 2008, according to the latest Bank of America Merrill Lynch Global Fund Manager Survey.
October’s survey found that 38% of investors expected global growth to decelerate in the next 12 months.
At the same time, a record 85% of survey respondents said they believed the global economy to be in the late cycle, 11% above prior highs in December 2007.
The new gloomy assessment was a far cry from the optimistic talk of ’synchronised global growth’ at the start of the year. However, it soon became apparent that while US growth was strong, the rest of the world economy was lagging, leading to ’decoupling’ between the US and the rest of the world becoming the new buzzword.
What are investors worried about?
Driving the bearishness over the global economy was primarily the ongoing trade dispute between the US and China. For the fifth time running, investors cited the trade war was as ‘the biggest tail risk.’
However, the number of investors citing the trade war fell for the third month in a row, with other concerns gradually creeping up.
Increasingly of concern to investors was tightening monetary policy (cited by 31 per cent of investors), which, by making bonds and cash more attractive, can harm the appeal of equities. Last week’s market sell-off was widely attributed to the US Federal Reserve’s rate rises.
Also creeping up the worry list is the slowdown in the Chinese economy, with 16% of fund managers citing it as a concern. China’s economy is under pressure from both US tariffs and an attempt by government authorities to tighten credit conditions.
China’s economy was key to powering global growth following the 2008 financial crisis – if the world is in late cycle, a synchronised slowdown in China would make a downturn even worse.
Is the US still a safe haven?
Investors remain broadly positive on the US economy, with more investors than not saying they expect a stronger US economy over the next 12 months. As the table below shows, divergence between investors expecting a strong US economy and weak global economy was at its widest level since October 2007.
A majority of investors (61%) also noted that they saw the profit outlook for the US as more favourable. While slightly down from the month prior, the level was still at a multi-year high.
However, that hasn’t stopped US investors starting to rotate out of US equities. Seeing the country seen as a safe haven in a world of weak growth and growing risk, investors piled into US shares in August and September. However, allocation to US equities has now started to reverse, wiping out much of that climb, with just 4% of managers now overweight the region.