Money managers have shown only a modest improvement in risk appetite as concerns over a potential recession still loom large, according to Bank of America Merrill Lynch's monthly fund manager survey released Tuesday.
Recession concerns continue to temper investor risk appetite, with 38% of respondents saying they expect a recession over the next year, vs. 59% who believe a recession is unlikely, marking the highest net recession risk since August 2009.
The survey of 235 money managers representing a total of $683 billion in assets under management was conducted Sept. 6-12.
Of the managers surveyed, 1 in 5 expect short-term rates to rise over the next year. In the September 2018 survey, 1 in 10 expected rates to fall.
Regarding what policies would be the most bullish for risk assets over the next six months, managers cited a German fiscal stimulus, a 50-basis point Fed cut and Chinese infrastructure spending.
Meanwhile, on the U.S. front, infrastructure spending is identified as the area of economic policy where investors surveyed think there is the most bipartisan support.
When asked about the inversion of the 2-year to 10-year U.S. Treasuries yield curve, 64% of managers surveyed say they do not think an inversion means there will be a recession in the next year.
Investor cash levels fell 0.4 percentage points to 4.7%, off the recent high of 5.7% in June and slightly above the 10-year average of 4.6%.
Allocation to global equities rebounded, albeit slowly, up 8 percentage points from August to net 4% underweight. Manager allocation to bonds, on the other hand, dropped 14 percentage points this month to net 36% underweight.
Allocation to U.S. equities rose 15 percentage points to net 17% overweight, the biggest monthly increase since June 2018, making the U.S. the most preferred region among surveyed managers.
A possible trade war continues to remain at top of a list of concerns of investors, with 40% of respondents citing it as their No.1 tail risk. Monetary policy impotence and a bond market bubble take the next two spots, each at 13%, followed by a slowdown in China (12%) as fourth on the list of top concerns.
"We remain contrarian bullish, as this month investors have shown only a modest improvement in risk appetite," said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, in a news release about the survey results. "Fiscal stimulus would boost investor optimism."