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Global Fund Managers See “Extreme Investor Pessimism”

Bank of America’s survey of global fund managers showed “extreme investor pessimism” regarding cash held to the bleak outlook they hold for the global economy.

Paul Singer’s Elliott Management said global stocks might lose half or more of their value from the high reached in February, predicting a 1930s-esque Great Depression. In a letter to clients, the New York-based hedge fund wrote that the sharp market decline seen between late February and late March “provided a heavy bookend to a dozen years of basically nonstop positive returns in global stocks, bonds, and real estate.” 

The firm, which controls $40.4 billion in assets, added: “Our gut tells us that a 50 percent or deeper decline from the February top might be the ultimate path of global stock markets.” 

The global fund managers don’t anticipate a further plunge in global GDP cuts, but, in their view, global EPS cuts are just beginning. 63% of respondents to the April survey foresee profits will deteriorate in the next year versus a net 2%, expecting worse global growth in the next 12 months. The amount of cash held increases to 5.9% from 5.1%, which is the highest level since the September 11 terror attacks. 

Heightened market volatility has pushed the cash levels of several equity higher by 10-30 percent in March––a sign that fund managers are betting on markets to correct even more.

93% anticipate a global recession in 2020. The Morgan Stanley CEO James Gorman estimates the coronavirus-induced depression could last through 2021. “I think, you know, through the end of next year we’re going to be working through this global recession,” Gorman said. 

Of the global fund managers surveyed, 52% foresee a U-shaped recovery, 22% see a W-shaped recovery, and just 15% expect a V-shaped recovery. Equity allocation is at its lowest levels since March 2009, when the S&P 500 touched its low of 666 during the global financial crisis. 

FMS investors are currently long cash, healthcare, staples, utilities, US, tech, bonds, while shorting energy, equities, materials, industrials, UK, banks, Eurozone.

57% of the global fund managers envision a second wave of COVID-19, followed by a systemic credit risk at 30%. Fund managers have minimized exposure to cyclical assets, such as equities, banks, emerging markets, and the euro zone, while switching to staples, cash, tech, US and healthcare assets.

A record 50 percent of respondents said they were heavy cash relative to the benchmark, while the most crowded trades in the most recent survey are longs in US government bonds, cash, US dollars, US tech and growth stocks.

Equity allocations fell 25 percentage points month-over-month to a net 27 percent underweight, the lowest since March 2009.