Investors positioning for fall in markets: BofAML survey

Mumbai: Investors are positioning for a fall in the equity market in the coming months, as per the survey by Bank of America Merrill Lynch for May.

The survey showed that a record 34% of the fund managers have bought protection against a sharp fall in equity markets over the next three months.

A total of 250 panellists with $687 billion in assets under management participated in the survey which took place between May 3 and May 9.


"34% of FMS investors say they have taken out protection against a sharp fall in equity markets over the next three months, the highest level ever on an absolute and net basis," according to the survey.

Trade war remains the biggest tail risk for markets although the concerns are still well below peak levels seen in July 2018.
The survey also noted that while investors are well-hedged, they are not positioned for a trade deal breakdown. Slowdown in China and US politics were also among the biggest tail risks, as per the survey.

Global markets have been in a turmoil since US President Donald Trump on May 5 tweeted that the country will hike tariffs on $200 billion of Chinese imports. The tariffs were hiked on May 10. In response, China on Monday said that it will raise tariffs on $60 billion of US goods from June 1.

Most Asian markets ended down 0.3-1.5% in reaction to China's move. India's benchmarks halted their nine-session losing streak to end up 0.6-0.8%. South Korea's Kospi index ended up 0.1%.

Fund managers believe that US equities would need to fall 22% from May 2019 highs before the US Federal Reserve steps in to support the markets by cutting rates.

Equity allocation has dropped 6 percentage points in May from the previous month to 11% net overweight. The current allocation is below the long-term average.

Allocation to bonds remains at a seven year high of 34% underweight while cash allocation climbed 7 percentage points from a month ago to 33% overweight, the survey results showed.

Allocation to commodities jumped 11 percentage points to net 8% underweight as trade war concerns weighed on commodities, the survey showed.

However, despite rising concerns over US-China trade issues, just 5% of the fund managers surveyed expect a global economic recession in 2019 while two-third see no recession until the second half of 2020 and beyond.

About 35% were long US technology was the most crowded trade, the most crowded trade, followed by short European equities, long US dollar and long emerging markets.