Trade war is still the biggest ‘tail risk,’ say global fund managers

Global fund managers still see a trade war as the biggest “tail risk” facing investors. Around 57% of fund managers cited “trade war” as the biggest tail risk, putting it at the top of the list for a third straight month, the Bank of America Merrill Lynch survey of fund managers found. The survey of 185 managers with $534 billion in assets under management was conducted between Aug. 3 and 9.

Meanwhile, investors have continued to pile into U.S. stocks. The survey found participants were the most overweight U.S. equities since January 2015. Allocation to U.S. equities rose 10 percentage point to a net 19% overweight, making it the top equity region for the first time in five years. The earnings outlook for U.S. companies was at a 17-year high. The S&P 500 SPX, +0.64% exited correction territory in July and remains less than 2% below its all-time high set in January.

At the same time, the survey found the average cash level rose to 5% from 4.7%. According to BAML, a reading above 4.5% is a contrarian “buy” signal. The survey, which wrapped up before Turkey’s currency crisis hit critical mass, found investors were slightly underweight emerging market equities. In terms of rotation, the survey showed participants are buying banks KBWB, +1.33% and continue to flock to perceived havens like U.S. equities and cash, while selling commodity sectors and defensive sectors and regions like materials, energy and U.K. equities UKX, -0.10% , BAML said.