A majority of investors are extremely bearish on the economy, said Bank of America Merrill Lynch's monthly fund manager survey released Tuesday.
Although only 9% of investors surveyed this month said they expect a global economic recession in 2019, a 2-percentage-point drop from the month before, a net 53% expect global growth to weaken over the next 12 months, the worst outlook on the global economy since October 2008.
December also has seen the third biggest decline in inflation expectations, down 33 percentage points to just a net 37% expecting the global consumer price index to rise over the next year. This statistic is a major reversal from the recent peak of net 82% in April.
A possible trade war remains the biggest tail risk for managers, with 37% of respondents putting it at the top of a list of concerns. The top three are rounded out by quantitative tightening (18%) and a China slowdown (16%).
Investor allocation to fixed income saw the biggest ever one-month rotation, rising 23 percentage points to net 35% underweight, marking the highest bond allocation since the Brexit vote in June 2016.
Meanwhile, allocation to global equities dropped 15 percentage points to net 16% overweight, a two-year low.
Broken down regionally, allocation to U.S. equities dropped 8 percentage points to net 6% overweight. Allocation to eurozone equities, meanwhile, declined 8 percentage points from last month, taking the region to underweight for the first time in two years.
Investor allocation to emerging markets equities rose 5 percentage points to net 18% overweight, marking the return as the No. 1 region of choice amongst investors. Finally, U.K. equities fell 12 percentage points to net 39% underweight, the second biggest underweight on record, as the approaching Brexit deadline is stoking renewed uncertainty.
The average cash balance saw a slight uptick to 4.8% from 4.7% last month.
"Investors are close to extreme bearishness. All eyes are on the Fed this week, and a dovish message could equal a bear market bounce," said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, in a news release about the survey results.
The survey of 243 money managers representing a total of $694 billion in assets under management was conducted Dec. 7-13.