“The April FMS shows extreme investor pessimism”, BofA’s Michael Hartnett writes, in the commentary that accompanies the latest edition of the bank’s closely-watched global fund manager survey.
Last month’s edition found market participants increasingly concerned. For instance, the March poll betrayed the biggest drop in growth expectations ever. Equity allocations collapsed by the most on record and cash levels surged.
Fast forward a month and cash levels jumped again, all the way from 5.1% to 5.9%. That’s the highest since 9/11.
(BofA)
“We say April equals peak pessimism’, Hartnett writes.
He underscores the point, noting that equity allocations are now the lowest since March of 2009, when the S&P hit its notorious “666” low.
(BofA)
If you’re wondering whether there’s something that approximates unanimity on the path for the global economy among the 183 participants in the April survey (who together control nearly $550 billion in AUM), the answer is yes.
“93% expect [a] global recession in 2020”, Hartnett notes. He also observes that while “investors think global GDP cuts are largely over” they believe “global EPS cuts are just beginning”. That, BofA says, represents “a rare dichotomy”.
What it really means, of course, is that the sheer rapidity and all-encompassing character of the economic collapse tied to the COVID-19 shutdowns prompted economists to “kitchen-sink it” (so to speak). Corporate management teams, on the other hand, have been slower to react, in part because their forecasts aren’t confined to the proverbial “ivory tower”. Withdrawing guidance, throttling buybacks and cutting dividends (for example) are actions that have immediate consequences in the market. Those consequences can potentially make things worse, especially if they exacerbate adverse trends in credit markets.
As for the trajectory of the eventual rebound from the crisis, respondents to BofA’s April survey see a “U-shaped” recovery, not a “V-shaped” miracle.
When it comes to cash management, investors are overwhelmingly concerned about leverage now that the cycle is turning. 79% of respondents want corporates to improve their balance sheets. That is the most in two decades.
Amusingly, only 5% are clamoring for cash to be plowed into buybacks, which is handy because they’re going to be curtailed significantly going forward, either by choice or, in some cases, by decree.
Not surprisingly, a “second wave” of COVID-19 is seen as the biggest tail risk (57%). The next most worrisome risk for respondents is a “systemic credit event”. That’s understandable given the abject turmoil that swept across credit markets in March. The Fed is determined to prevent such an event from occurring, though, as evidenced by the central bank’s willingness to take in fallen angels and otherwise sponsor the US corporate debt market.
For those wondering, BofA’s famous “Bull & Bear” indicator “remains pinned at 0.0”, Hartnett notes.
But, as he cautioned last month, that doesn’t necessarily green-light unbridled contrarian bullishness, even if recent gains have room to run. “We say one last leg up in the risk rally, but take profits [at] SPX 2850-3000”, Hartnett says.
So, the question is how much cash has been deployed in last 2 weeks?