Short positioning on European equities was the "most crowded trade" for the second straight month in April, a survey of fund managers by Bank of America Merrill Lynch found. Investors called bearish positions on Europe a crowded trade once again, although the market became slightly less pessimistic on the region, according to the survey, released on Tuesday.
Allocations to euro zone equities jumped 8 percentage points month-on-month to a net neutral as some Europe bears unwound their positions, betting the trade had become overcrowded. Trade war and a China slowdown were joint biggest tail risks, according to the survey of 187 investors with $547 billion assets under management, while growth worries dominated.
Some 66 percent of investors see a "low growth, low inflation" backdrop - the highest level since October 2016. While an inversion of the US yield curve led many to predict an imminent recession, the survey found 70 percent of investors expect a global recession to start only in the second half of 2020.
A volte-face by the US Federal Reserve on rate hikes helped drive stocks up this year. In the latest survey, a slim majority of investors said the US Federal Reserve will not raise interest rates again during this cycle. Allocation to global bank stocks fell to the lowest level since September 2016 - a reflection of investor wariness of the sector, which suffers when interest rates stay lower for longer.
"Investors are positioned for 'secular stagnation', long assets that outperform when growth and rates fall (cash, EM, utilities), short those that require higher growth and rates (equities, eurozone, banks)," wrote BAML strategists. Hedge funds, meanwhile, were chasing the equity rally. Their gross leverage - at 43 percent - and net equity exposure were both at the highest since September 2018.
UK stocks remained the surveyed investors' least favoured region. Allocations held flat from last month, at 28 percent underweight as another delay to the date of Britain's exit from the European Union was announced. "Sentiment has modestly improved from the max bearish 41 percent underweight in March 2018, but few investors own the region," the strategists wrote.