Global fund managers still see recession as a top risk in spite of the bouts of rallies seen in equities and bonds, showed Bank of America Merrill Lynch’s (BofA ML’s) latest survey.
This bearishness stems from the fading prospects of a US-China trade resolution. According to the report, 43% of those surveyed think the ongoing conflict between the world’s two largest economies is the new normal versus 36% who think there will be a resolution before the 2020 US Presidential election. As a result, growth expectations declined with 37% of fund managers expecting global growth to weaken over the next 12 months.
Recently, the International Monetary Fund (IMF) warned that the US-China trade tussle will shave off 2019 global growth, pushing it to its slowest pace since the 2008-2009 financial crisis. In the latest World Economic Outlook projections, IMF cut 2019 gross domestic product (GDP) growth to 3%, down from 3.2% in a July forecast, mainly due to trade tensions.
According to Michael Hartnett, chief investment strategist at BofA ML, while investors remain bearish, there are signs of green shoots. “If concerns about the trade war and Brexit are unrealized, sentiment is likely to improve, validating our bullish tactical views," said Hartnett in a statement.
Of course, the whole backdrop for global growth will take a turn for the better if these issues were out of way, but that is a big “if". For now, there is limited clarity over a quick resolution on both these issues.
In fact, Nomura Inc. said that even if a trade truce is reached, a synchronized global growth slowdown is set to continue.
In a report dated 15 October, it said that in the US, elevated trade tensions and other factors will likely slow growth over FY20 before a modest recovery in FY21.
The financial services group has cut its GDP growth forecast for the eurozone, as recession in euro area manufacturing risks spilling over into services. In case of Asian countries, it said that the export-led downturn has spilt into capex, now risking consumption. Nomura doesn’t expect a recovery in Asian economies in the near term.
Mark Haefele, global chief investment officer at UBS Wealth Management, is of the view that geopolitical uncertainty remains high and the credibility of the trade deal will be in doubt initially.
“Consequently, business sentiment may improve modestly, but not enough to change capital investment plans in the near term," said Haefele in his blog.
So, the onus to revive global growth remains on fiscal and monetary stimulus. The BofA ML survey showed that global fund managers are increasingly looking towards fiscal policy to boost growth. A record net 57% of investors think global fiscal policy is too restrictive compared to net 33% saying it was too stimulative as recently as November 2018, it added.