A “trade war” is the top tail risk for financial markets, according to fund managers, who also now overwhelmingly describe the global economy as entering the “late cycle” period.
“Cracks in the bull case are starting to emerge, with fund managers citing concerns over trade, stagflation and leverage,” said Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, referring to the firm’s monthly global fund managers survey released on Tuesday.
“Investors have yet to act on these fears, however, as rates and earnings are keeping the bulls bullish,” he said.
A potential global trade conflict was cited as the top worry by 30% of respondents, followed by inflation at 23% and a global growth slowdown at 23% (see chart below).
Trade war moved into the top spot after U.S. President Donald Trump earlier this month imposed tariffs on aluminum and steel imports and as the administration signaled further trade measures were in the offing, underlining worries over a potential tit-for-tat spiral of retaliation that could pose a threat to global growth. Trade-war fears last topped the list in January 2017 ahead of Trump’s inauguration.
The survey was conducted between March 9-15 and included 176 participants, with a combined $514 billion in assets under management.
In other findings, the poll found that 74% of investors believe the global economy is in the late cycle, the highest percentage in survey history.
The survey, however, showed that despite qualms, investors remained long global stocks, banks and tech, while remaining short bonds and defensives, while cash levels fell from 4.7% to 4.6%.
Meanwhile, subdued interest rates and strong earnings continued to encourage bulls, the survey found, with most expecting it to take a significant rise in Treasury yields to prompt a rotation out of stocks. When asked what 10-year Treasury yield level would incite rotation from stocks to bonds, the survey produced a weighted-midpoint of 3.6%. The 10-year yield TMUBMUSD10Y, +0.00% was up 3.2 basis points Tuesday at 2.875%.
Meanwhile, fund managers said long bets on FAANG+BAT remained the “most crowded” trade. The acronyms refer to a combo of U.S. and Chinese tech juggernauts, with FAANG consisting of Facebook Inc. FB, -2.56% Amazon.com Inc. AMZN, +2.69% Apple Inc. AAPL, -0.03% Netflix Inc. NFLX, +1.28% and Google parent Alphabet Inc. GOOG, -0.19% BAT refers to Baidue Inc. BIDU, +0.64% Alibaba Group Holding BABA, +2.27% and Tencent Holdings Ltd TCEHY, +2.45%
U.S. stocks surged in January before falling into correction mode—retreating more than 10% from record levels—after an inflation scare that was accompanied by the violent unwinding of bets that volatility would remain subdued, which also sent ripples through financial markets. The survey had identified short volatility as the most crowded trade in January.
The S&P 500 SPX, +0.15% was up 0.1% and the Dow Jones Industrial Average DJIA, +0.47% gained 0.4% on Tuesday as stocks attempted to rebound from a sharp, tech-led selloff sparked by expectations the sector will see increased scrutiny as U.S. and European leaders call for inquiries into Facebook’s data use after reports that a firm collected information from millions of Facebook users and used it without permission.
