Fund managers are bracing for a recession as they pull money out of emerging markets like China and seek the safety of cash and bonds, according to Bank of America Merrill Lynch.
The bank’s monthly survey found that the percentage of investment professionals who were weighted toward stocks fell from 41 percent in August to 17 percent this month, the lowest in three years. Fund managers also had the worst expectations for global economic growth in five years.
That kind of widespread gloom may point to an economic slowdown — or conversely, be a contrarian set-up for stock-market gains, said Michael Hartnett, chief investment strategist at BofA.
“Unambiguous pessimism means risk assets riper for a rally,” he said in a Sept. 15 report obtained by Newsmax Finance
. “If no rally, then markets ominously hinting ‘recession’ and/or ‘default' imminent.”
The bank’s survey comes after a volatile August, when China devalued its currency and investors feared that the world’s second-biggest economy was in deep trouble. U.S. stocks sank more than 10 percent from this year’s record highs, putting them in correction territory.
Meanwhile, the risk of missing a bond payment has increased for countries including Ukraine, Pakistan, Egypt, Cyprus, Russia and Brazil, according to credit-default swap data.
As fund managers turned cautious, their average allocation to cash rose from 5.2 percent to 5.5 percent, a high not reached since Lehman Brothers Holdings Inc. collapsed seven years ago, according to BofA’s research.
Portfolio managers also expected a more dovish stance from the Federal Reserve, which meets this week to set the cost of borrowing. The percentage of fund managers who expect a Fed rate hike tomorrow fell to 25 percent from 48 percent, BofA said.
Michael Pento, president of Pento Portfolio Strategies, is among the investment advisers who recommends getting out of stocks until the Fed goes back to looser monetary policy.
The idea that the Fed will only raise interest rates once this year and then stay on hold “has no historical basis and is just wishful Wall Street thinking,” he said.
Once the Federal Open Market Committee starts raising rates, it won’t stop until there are signs of an economic slowdown, Pento said in a Sept. 14 blog
. He points to historical precedence of hikes in the past 30 years and to the “dot plot” estimates
by FOMC members that show rate increases through 2016.
“The Fed will only be able to move the Fed Funds Rate higher by 50 to 75 basis points before it becomes obvious even to the hopelessly confused FOMC that global markets and economies are in serious trouble,” he said. “This is why wise investors should now be out of, or short, the stock market. At least until the S&P 500 trades near 1,600; or the Fed transitions to an easing stance.”
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