Fund managers up cash, start to price in more hawkish Fed, BofA-ML says

Global fund managers topped up their holdings of cash and lowered their allocation to global equities, according to the results of Bank of America-Merrill Lynch's fund manager survey for the month of September, especially towards Emerging Markets and Europe.

Nevertheless, their optimism around America's growth prospects also waned.

"Investors are holding on to more cash, telling us they are bearish growth and bullish US decoupling," said Michael Hartnett, BofA-ML's chief investment strategist.

"Fund managers are signalling that they are starting to price in a hawkish Fed."

The proportion of fund managers expecting the global economy to slow in the next year jumped from a net 7% last month to 24%, for the worst outlook on the global economy since 2011.

For a fourth straight month, a trade war was the most commonly cited risk (43%), followed by a China slowdown (18%) and quantitative tightening (15%).

While a net 28% of respondents believed growth in Asia and Europe would accelerate and 24% said the US would continue to "decouple" from the rest of the world, 48% now believed the decoupling would end as the US economic expansion slowed.

In parallel, investors' allocation to global equities was cut by 11 percentage points to 22% overweight, bringing it back to the levels seen in July, which was the lowest for 18 months.

Investors also cut their allocation to euro area stocks by six percentage points to 11% overweight - an 18-month low - and that for Emerging Market shares by nine percentage points to 10% underweight.

The latter was the slowest since March 2016 and marked a "massive" reversal from the 43% overweight allocation of April 2018, when EM was the most favoured region.