Emerging markets (EMs) saw their biggest drop in equity market allocations, as investors took their EM allocations down 23 percentage points to a negative 1% underweight this month, according to the Bank of America Merrill Lynch (BofA ML) survey of global fund managers. The current allocation is 0.9 standard deviations below the long-term average.

“Trade War" was cited by fund managers as the biggest tail risk to markets, with conviction about the risk the highest since the 2012 debt crisis in the European Union (EU).

The risk-off sentiment led investors to sell banks, EM and eurozone equities, and rotate their funds into US equities, healthcare and technology.

The sour mood was also reflected in the expectations for global growth, which dropped to the lowest level since February 2016. Overall allocation to equities fell to its lowest level since November 2016.

Nevertheless, it’s worth remembering that the BofA ML survey is usually taken as a contrarian indicator. The survey says that the BofA ML Bull and Bear indicator is close to an “extreme bearish" contrarian buy signal. They advise contrarian bulls to position for overblown trade war fears via yield curve steepening, EM and EU stock upside, weaker US dollar, and contrarian bears to go long gold, short US tech/FAANG (Facebook, Apple, Amazon, Netflix and Google) stock.