Money managers remain bearish on the economy despite the rally in credit and equities, according to Bank of America Merrill Lynch's monthly fund manager survey released Tuesday.
Recession concerns continue to temper investor risk appetite as 31% of managers surveyed expect a recession over the next year, vs. 67% who see a recession as unlikely.
The survey of 230 money managers representing a total of $620 billion in assets under management was conducted Oct. 4-10.
Only 18% of investors surveyed expect short-term interest rates to rise over the next year, a major reversal from September 2018, when 87% expected higher short-term rates.
Looking ahead to the next decade, 30% of managers surveyed expect emerging markets to outperform other equities markets, followed by the U.S. (22%), China (17%) and Europe (15%).
Investor cash levels rose to 5% from 4.7% last month, off the recent high of 5.7% in June and just above the 10-year average of 4.6%.
Allocation to global equities continues to rebound slowly, up 5 percentage points from last month to net 1% overweight. Allocation to U.S. equities slipped 2 percentage points to net 15% overweight, making it still the most preferred region amongst surveyed managers.
Managers are most overweight to consumer staples since May 2013 and most underweight to materials since February 2016.
This month, investors rotated into defensive equities, like health care and consumer discretionary, and out of cyclicals such as materials and banks.
Trade war concerns continue to top the list of tail risks cited by managers, at 40%, with monetary policy impotence and a bond market bubble taking the next two spots, each at 13%. A credit event ranked fourth on the list of concerns, at 11%.
Forty-three percent of managers surveyed said the trade war between the U.S. and China is the new normal and won't be resolved, while 36% said a resolution will be found before the 2020 U.S. presidential election.
Three quarters of managers believe an end to the trade war would be the most bullish catalyst for stocks in the next six months.
"Investors remain bearish but we are seeing signs of green shoots," said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, in a news release about the survey results. "If concerns about the trade war and Brexit are unrealized, sentiment is likely to improve, validating our bullish tactical views."