Global investors' worries about a trade war skyrocketed in July, Bank of America Merrill Lynch reported Tuesday.
Sixty percent of respondents in Merrill's fund manager survey said a trade war was the biggest tail risk to the markets, 29 percentage points higher than in the June survey. Merrill said this was the highest tail risk recorded since the 2012 EU debt crisis.
Nineteen percent of investors said a hawkish policy error by the U.S. Federal Reserve or European Central Bank was a major tail risk, and 6% cited a euro/emerging markets debt crisis.
The survey was conducted July 6 to 12 among 231 panelists with $663 billion in assets under management.
"Investor sentiment is bearish this month, with survey respondents eyeing the risks from a possible trade war," Merrill's chief investment strategist Michael Hartnett said in a statement. "Equity allocation has fallen notably while growth and profit expectations have slumped."
Net -11% of survey respondents said they expected faster global growth in the next 12 months, down 12 points from last month and the lowest level since Feb. 11, 2016, when the S&P 500 hit an intraday low of 1,810.
Asked their expectations for global profits, net 9% of investors expected no improvement in the next 12 months, down 53 points from the beginning of the year.
According to the survey, net 11% of respondents did not think corporate earnings would improve by 10% or more over the next year, way down from net 35% in February.
Global equity allocation in July fell 14 percentage points to net 19% overweight, the lowest level since November 2016. The survey found notable shifts in regional equity allocations.
Allocation to U.S. equities rose eight points to 9% overweight, the highest level in 17 months, after having been 28% net underweight in September.
An eight-point drop in allocations to eurozone equities reduced the allocation to net 12% overweight, the lowest level since December 2016.
Emerging market equities experienced their biggest decline in two years, plummeting 23 points to net 1% underweight.
U.K. equities allocations saw their fifth consecutive monthly increase in July: three points to net 18% underweight, the highest level since February 2016.
