Fund managers’ profit growth expectations have plummeted and are at their worst since 2008. According to the Bank of America Merrill Lynch survey of fund managers for January, a net 52% of managers surveyed think global profits will deteriorate over the next 12 months.
This is a major reversal from 39% saying profits would improve 12 months ago, said the report.
The grim outlook is in line with deteriorating global GDP (gross domestic product) estimates. Net 60% of those surveyed think global growth will weaken over the next 12 months. This is the worst outlook on the global economy since July 2008 and below the trough in January 2001, showed the fund managers’ survey. The biggest tail risk for investors remains the US-China trade war.
“Investors remain bearish, with growth and profit expectations plummeting this month," said Michael Hartnett, chief investment strategist. “Even so, their diagnosis is secular stagnation, not a recession, as fund managers are pricing in a dovish Fed and steeper yield curve."
Apart from profit growth, investors are also concerned about the worsening credit cycle. Net 48% of investors think corporate balance sheets are over-leveraged. A higher number of respondents feel that companies should deploy cash in deleveraging, rather than on capex and/or dividend/buybacks.
“In 2019, especially in the US, we think that the headwinds will become more fundamental in nature as growth slows and earnings growth stalls, hitting the most levered credits hardest," Morgan Stanley said in its 2019 Global Strategy Outlook report on 25 November 2018.