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Trade war, China slowdown biggest tail risks: BofAML

As many as 34 per cent of FMS investors say they have taken out protection against a sharp fall in equity markets.

ETMarkets.com|
May 14, 2019, 09.03 PM IST
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Global investors are well-protected heading into a correction as portfolio hedging hits record high of 34 per cent in the survey history, BofA Merrill Lynch Global Fund Manager Survey said on Tuesday.

Portfolio hedging normally helps in protecting returns in an uncertain market.

The survey of fund managers also disclosed that cash allocation climbed by 7 percentage points to 33 per cent sequentially overweight. The survey was conducted during May 3-9 amid rising trade tensions between the US and China.

“As many as 34 per cent of FMS (fund manager survey) investors say they have taken out protection against a sharp fall in equity markets over the next three months,” BofAML said.

Trade war is seen as the biggest tail risk by 37 per cent of the fund managers followed by China slowdown (16 per cent) and US politics (12 per cent), the survey showed.

BofAML Bull & Bear Indicator stood at 5.1, which means little reason to “buy in May” unless 3Cs of credit, consumer and China (trade deal) quickly surprise to upside.

China on Monday said it would impose higher tariffs on $60 billion on US goods despite President Donald Trump’s warnings not to retaliate against additional tariffs on Chinese imports announced by the US on Friday.

Trump last week ordered to begin imposing tariffs on all remaining imports from China, a move that would affect an additional $300 billion worth of goods.

“May FMS shows investors removing underweights in eurozone and banks and adding to crowded tech by cutting exposure to bond proxies and commodities. Overall investors are not positioned for full escalation of a US-China trade war,” the survey said.

Investors do not see any recession in the near term. The survey showed that just 5 per cent of FMS investors expect a global economic recession in 2019, while two-thirds say no recession until the second half of 2020 or beyond.

However, a majority of investors sees S&P 500 falling to as low as 2,305, down 22 per cent from May 2019 high of 2,954 before the Fed stepped in to support markets by cutting rates. The index is now hovering at the 2,811 level.

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