Big investors expect global economy to decline

A growing number of fund managers are predicting the global economy will deteriorate in the coming twelve months, while sentiment towards the US stockmarket has hit its lowest level since November 2006.

According to the July BofA Merrill Lynch fund manager survey, of the 202 managers questioned 12% gave a negative forecast for the global economy, the first since February 2009. This signifies a notable shift in opinion, considering the previous month 24% of fund managers forecasted that the economy would strengthen.

Risk appetite has fallen significantly, with 39% of managers taking lower than normal risks, more than double the proportion in May.

This heightened risk aversion is also reflected in the allocation towards pharmaceuticals, described in the report as 'a classic bear market sector,' which increased to the highest level since March 2009.

The outlook for US equities has also turned around sharply in July, with 14% of fund managers saying it is the region they would most like to underweight. Only last month 14% said the US was the region they most wanted to overweight. Levels of concern for US equities are at their highest point than at any time since November 2006, according to the survey.

‘July’s survey echoes the sentiment that investors expressed during the recession in early 2009,’ said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.

‘Growth and profit expectations have double-dipped,’ said Michael Hartnett, the firm’s chief global equity strategist. ‘Should upcoming data fail to confirm a double-dip, risk assets will have a much better third quarter.’

Emerging markets have been gaining in popularity with 34% of respondents overweight in the region’s equity sector, up from 19% in May. The report also revealed 48% of investors identify emerging markets as the region they would most like to overweight over the next 12 months, more than double the reading in May.

The eurozone equities market was also discussed with the number of investors underweight in the sector falling to 10% in July from 27% in June.

At the same time 17% of European investors expect the region’s economy to weaken.