One week ago, we brought you the results of the latest Barclays Global Macro investor survey, which revealed something concerning: when asked about their expectations for global growth – Is the economy likely to perform similarly to consensus expectations, and if not, will it disappoint or delight – for the first time in at least four years, more than half of respondents responded that a disappointment lies ahead.
Today, in the latest monthly survey from Bank of America covering the period July 6-12 and polling a total of 231 panellists with $663bn AUM, we find that sentiment and outlook have both continued to slip, and while the usual suspects remain: fears about trade war and concerns that FAANG is the most crowded trade, what is notable is that even as Wall Street expects another blockbuster earnings season, profit expectations have crashed to the lowest level since February 2016.
“Investor sentiment is bearish this month, with survey respondents eyeing the risks from a possible trade war,” said Michael Hartnett, chief investment strategist. “Equity allocation has fallen notably while growth and profit expectations have slumped.”
Here is the punchline the immediately sticks out from the report: a net -9% of respondents think global profits will not improve in the next 12 months, down 53ppt from Jan’18 and the lowest since Feb’16. This means that a majority of investors now believe that profits have topped out and will slide in the coming year.
Looking at the data, BofA suggests that this signals potential underperformance ahead for cyclical vs. defensive sectors.
Meanwhile, just like the Barclays survey, a net -11% of respondents now expect faster global growth in the next 12 months, down 12ppt from last month and the lowest level since February 11, 2016 when the S&P hit an intraday low of 1810.
Adding to the bearish sentiment, in addition to plunging growth & profit expectations, equity allocations are now the lowest since Nov’16, falling 14% to net 19% overweight, the lowest since Nov’16….
… while the forecast of yield curve steepening is at an 8-year low, suggesting the virtually everyone expects continued curve flattening…
… paradoxically, even as the latest CFTC report showed that net specs have record steepener bets on currently, making one wonder once again if surveys are merely there for investors to say what they think they should say instead of what they actually are doing.
Looking at some of the other favorite questions, in July “trade war” remains by biggest tail risk cited by the vast majority of respondents (60%), with investor conviction the highest since concerns surrounding EU sovereign debt funding in July 2012; the top three are rounded out by a Fed/ECB hawkish policy mistake (19%) and a Euro/EM debt crisis (6%)
The number of investors who are now worried about trade war doubled over the past month.
Continuing a trend started in February, long “FAANG+BAT” remains the most crowded trade since “long US dollar” in 2015 as investors aggressively rotated to “growth” theme via tech & pharma, and largest US equity “long” since Feb ’17.
- Looking at these responses, CIO Michael Hartnett shares the following key takeaways:
- Trade war biggest tail risk since EU debt crisis in 2012; long FAANG+BAT most crowded trade since long US$ in 2015
- Contrarian bulls – position for overblown trade war fears via yield curve steepening, EM & EU stock upside, weaker US dollar
- Contrarian bears – position for “peak profit, peak policy stimulus” theme via long gold, short US tech/FAANG
And provides the following recommendations:
- We tactically advise contrarian bulls to position for overblown trade war concerns via yield curve steepening, EM & EU stock upside, weaker US dollar (note extreme EU debt “tail risk” of Jun’12 followed by 45% rally in EU banks in 3 months).
- We cyclically advise contrarian bears to position for “peak profit, peak policy stimulus” theme via long gold, short US tech (note extreme “long US$” trade of Dec’15 followed by 8% plunge in DXY in 6 months).
Go to Source
Author: Tyler Durden