Fund managers have cut equity allocations to the lowest level since November 2016 lows, and 60 percent of investors see trade war as the biggest risk for markets, Bank of America Merrill Lynch's (BAML) latest monthly poll showed on Tuesday.
The bank's July survey of funds managing $663 billion worldwide showed a 14 percentage point cut in equity exposure to a net 19 percent overweight, the lowest level since the election of Donald Trump as president of the United States. Trade war was identified as the biggest tail risk, while 19 percent named a hawkish policy mistake by the US Federal Reserve or European Central Bank.
Trump has stepped up his attack on the US's key trading partners over the last month, rolling out tariffs against China and threatening more, whilst labelling the European Union a "trade foe". The survey was conducted July 6-12, BAML said. "Investor sentiment is bearish this month, with survey respondents eyeing the risks from a possible trade war," said Michael Hartnett, chief investment strategist at BAML. "Equity allocation has fallen notably while growth and profit expectations have slumped."
However, investors remained bullish on US stocks, raising their overweight to 9 percent, the highest since February 2017. Conversely, the eurozone equity allocation fell to a net 12 percent overweight, the lowest since December 2016. So-called FAANG and BAT technology shares were identified as then most "crowded" trade for the sixth month in a row, cited by 53 percent. "Short EM equity" was cited by 12 percent and "long oil" by 10 percent.
Allocation to UK equities rose to a net 18 percent underweight, the highest in over two years. Investor sentiment towards Britain has been poor since Britain voted to leave the European Union in June 2016 but recent sterling weakness has lifted equity markets in recent months.
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