The second wave of Covid-19 is the biggest tail risk for the markets with 52 per cent of the fund managers surveyed by BofA Securities in May agreeing to the possibility. Permanently high unemployment, the break-up of the European Union (EU), and systemic credit event are the other tail risks cited. Vaccine breakthrough, the survey findings suggest, was the most likely V-recovery catalyst.
A total of 223 panelists with $651 billion worth of assets under management (AUM) globally participated in the survey between May 7 and May 14, BofA said.
Despite the sharp recovery seen since March lows, 68 per cent of the fund managers surveyed believe that equities are in a bear market rally and only just 25 per cent seeing this as a bull market phase. Cash levels with fund managers surged to 5.7 per cent in May, well above 4 per cent in February and slightly below April, the survey findings suggest.
The coronavirus pandemic has not only rattled global economies but has triggered an across-the-board sell-off in equities as an asset class. Since the first cases of this recent pandemic came to light in late 2019, global markets have seen a sharp correction. The Dow Jones Industrial Average (DJIA) and the S&P 500 ended their 11-year bull-run – the longest ever in history, while the S&P BSE Sensex and the Nifty 50, too, entered bear-market territory. Typically, a fall of 20 per cent or more in stock, or an index, is classified as a bear phase for that traded unit. However, initiatives by global central banks and the governments to stem the economic rout over the past couple of months have helped calm investor’s nerves and aided the partial recovery in the markets.
So, who has been buying then? Hedge funds, BofA Securities said, have a net 34 per cent long exposure to equity markets, just below January 2020 / February 20 level. “Hedge funds have increased their exposure to equities by 15 ppt this month (May) to net 34 per cent, largest month-on-month (MoM) since June 2018,” the survey findings suggest.
As economic forecasts continue to deteriorate given that most countries remained under lockdown since the past two months, 75 per cent of fund managers surveyed by BofA believe the recovery will be U or W-shaped. Only 10 per cent of the 194 respondents in the survey were expecting a V-shaped recovery.
“FMS global growth expectations jumped by 40 percentage points (ppt) to net 38% of FMS investors expecting global growth to strengthen over the next 12 months, but investors do not expect global manufacturing PMI to rise back above 50 before November 2020,” BofA Securities note said.