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Fund managers haven’t been this aligned on the market’s biggest tail risk in six years.

A trade war now clearly dominates as the largest-known unknown source of potential downside for investors worldwide, according to Bank of America Merrill Lynch’s July global fund manager survey. The firm polled those with US$542-billion combined.

Sixty per cent of respondents deemed a protectionist showdown to be the biggest threat for markets, up from 31 per cent in June.

“This month, trade war remains the biggest ‘tail risk’ for fund manager survey investors with conviction the highest since concerns surrounding EU sovereign debt funding in July 2012,” Michael Hartnett, the bank’s chief investment strategist, wrote.

That was the month European Central Bank President Mario Draghi famously pledged that monetary policy-makers would do “whatever it takes to preserve the euro.”


As fears surrounding the future of cross-border commerce mount, investors are flooding into more structural growth stories – the U.S. and Chinese tech groups known as FAANG and BAT.

Long positions in Facebook Inc., Inc., Apple Inc., Netflix Inc., Google as well as Baidu Inc., Alibaba Group Holding Ltd. and Tencent Holdings Ltd. are the most-crowded trade since “Long USD” in January, 2015, according to BofA. They have occupied the top spot for six straight months.

One leg of these trades began to deflate after the close on Monday, when Netflix’s lower-than-expected subscriber growth sparked a sell-off of as much as 15 per cent. Meanwhile, the options market has signalled some creeping concern that the Nasdaq 100 Index’s strong year-to-date showing might cease.

The crowded tech-leadership trade showed signs of cracking in late April when the FAANG-BAT group initially suffered during earnings season. Both segments managed to bounce back strongly, though the BAT trio have come under acute pressure amid the escalating U.S.-China trade spat.

Run for Shelter

All told, however, investors are running for the relative shelter of U.S. equities amid the global trade frictions. A net 9 per cent of fund managers surveyed reported being overweight American stocks, the highest share in more than a year and a sea change in sentiment relative to the net 28 per cent who were underweight the asset class in September, 2017.

Mr. Hartnett offered some advice to investors looking to fade the threat of a breakdown in the rules of global commerce.

“We tactically advise contrarian bulls to position for overblown trade war concerns via yield curve steepening, emerging-market and European stock upside, weaker U.S. dollar,” he wrote. He noted that European banks went on a blistering rally after fund managers’ fears regarding the continent’s sovereign debt crisis reached similar extremes.

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