Investor sentiment resembles that of the “credit crunch months of early 2009”, according to December’s fund manager survey from Bank of America Merrill Lynch (BofA ML).
Managers are bracing themselves for a year of low growth and inflation in 2012 as they enter the new year with high cash weightings and a majority favouring further simulative monetary policy.
Equity ratings are at a historic low, with 50% of participants describing US equities as the most favourable. Despite this, 48% predict a sovereign downgrade of the US in 2012.
The US was the only region in which equity positions were increased.
The tail risk presented by a US downgrade was identified as a minimal one, especially compared to that of a Chinese “hard landing” or the issue of EU sovereign debt funding.
A record 72% of participants have identified Europe as presenting the worst outlook for corporate profits in 2012, as the gap between US and EU profit expectations widens to record levels.
Although the ongoing sovereign debt crisis presents the greatest risk to investors, nearly half of participants remain confident that there will be no member state departure from the eurozone in the foreseeable future.
Perceptions of a descent into recession have slowed since September but there is still a strong sense of continued progression towards such a scenario.
The global economy is rapidly approaching the same position in the economic cycle as it stood in August 2008, managers agree.
Investors are consequently consolidating defensive positions in equities and are increasing weightings to pharmaceuticals and consumer staples.
Oil and gas remains the most popular sector among managers and the retail sector has now displaced banks as the least popular.