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Thirty-seven percent of investors in Bank of America Merrill Lynch's May fund manager survey cited a trade war as the no. 1 tail risk — not surprising considering that the poll was conducted May 3 to 9.
On Friday, May 10, after threatening to do so days earlier, President Donald Trump increased tariffs on $200 billion of Chinese goods to 25% from 10%. On Monday, China retaliated with tariffs on $60 billion worth of goods, effective June 1. The trade talks are said to have come to a halt for now, though Trump has said a deal could come within a month.
In the fund manager survey, a China slowdown and U.S. politics rounded out investors' top concerns, at 16% and 12%.
The survey sample comprised 250 panelists with $687 billion in assets under management.
Thirty-four percent of investors surveyed said they had taken out protection against a sharp fall in equity markets over the next three months, the highest level in survey history on an absolute and a net basis, Merrill reported.
The fund managers in the survey "are well-hedged but not positioned for a breakdown in trade talks," Merrill's chief investment strategist Michael Hartnett said in a statement. "Investors see little reason to 'buy in May' unless the 3Cs — credit, the consumer and China — quickly surprise to the upside."
Fund managers' global growth expectations held flat from the April survey, with net 5% of respondents expecting global growth to weaken over the next year. Two-thirds of the sample did not expect a global recession until the second half of 2020 or later.
Investors in the survey opined that U.S. equities would have to fall to as low as 2,305 on the S&P 500 before the Federal Reserve would cut the federal funds rate. (The index was at 2,849 in midday trading on Wednesday.)
Few investors said they were positioned for a sharp rally in interest rates. Seven out of 10 expected interest rates to be broadly range-bound over the next year, at between 2% and 3%. Only 4% of those surveyed expected yields to return to below 2%.
