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BofA: Managers expect economy to slow, but see chance of recession as slight

A majority of investors are bearish on the economy, but still few expect a global recession in 2019, said Bank of America Merrill Lynch's monthly fund manager survey released Tuesday.

A net 60% of surveyed investors this month expect global growth to weaken over the next 12 months, up from 53% the previous month. It is the worst outlook on the economy since the July 2008 survey. However, investors are saying they expect secular stagnation over the next two to three quarters rather than an outright global recession, with only 14% of surveyed investors expecting that in 2019, up from 9% in December.

The current month also has seen a collapse in inflation expectations, with just a net 19% expecting the global consumer price index to rise over the next year. That number is down 18 percentage points from a net 37% in December, which itself was down 33 percentage points from 70% in November. It continues the major reversal from the recent peak of a net 82% in April 2018.

A possible trade war remains the biggest tail risk for managers, with 27% of respondents putting it at the top of a list of concerns, although the number is down from the 37% that cited it as the biggest concern in December. Rounding out the top three are a China slowdown and quantitative tightening, each receiving 21% of responses.

After reaching a two-year low in December, which saw the allocation to global equities fall 15 percentage points to a net 16% overweight, equity allocations improved 2 percentage points in January to a net 18% overweight.

Fixed income, meanwhile, saw its allocation drop 7 percentage points for January to a net 42% underweight after December saw the highest bond allocation since the U.K.'s vote to leave the European Union in June 2016.

Broken down regionally, the allocation to U.S. equities dropped 5 percentage points to net 1% overweight. Allocation to eurozone equities, meanwhile, declined another 4 percentage points from December, bringing it to a net 11% underweight, continuing what has been a gradual cutting of those allocations since the fourth quarter of 2017.

Investor allocations to emerging markets equities jumped 11 percentage points from December, bringing it to a net 29% overweight and U.K. equities rose 1 percentage point to a net 38% underweight, still the largest underweighting among surveyed investors after reaching the second biggest on record in December as the approaching Brexit deadline stoked renewed uncertainty.

The average cash balance saw a slight uptick to 4.9% from 4.8% in December.

"Investors remain bearish, with growth and profit expectations plummeting this month," said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, in a news release about the survey results.. "Even so, their diagnosis is secular stagnation, not a recession, as fund managers are pricing in a dovish Fed and steeper yield curve."

The survey of 234 money managers representing a total of $645 billion in assets under management was conducted Jan. 4-10.