Amid mounting recession fears, BAML survey suggests a contrarian ‘Buy’ signal is generated for equity market

The risk of a global recession might be at its highest since August 2009 as average cash levels which fell to 4.7 percent in September. However, it is still above the 10-year average of 4.6 percent generating a contrarian buy signal, according to a survey of fund managers.

The September edition of the Global Fund Manager Survey (FMS) covers 182 participants representing $562 billion worth of combined assets under management.

According to BAML, investors showed modest improvement in risk appetite. Rotation from growth to value has yet to occur, as they are waiting for catalysts such as fiscal stimulus and/or earnings improvement.

The cash levels are lowered to 4.7 percent in September compared to 5.1 percent in August and is above the 10-year average of 4.6 percent.

“When the cash balance is above 4.5 percent, BAML suggests a contrarian buy signal is generated for the equity market. The indicator has been in "buy" territory for the past 19 months,” it said.

“The bank’s other technical indicator – the Bull & Bear Indicator – is at 0.7. It is now in contrarian buy territory where the index ranges from 0 to 10. The sell signal is triggered when the index hits the level of 8,” said the survey note.

Confidence in global equities may be dented by emerging tail risks. However, we have yet to see the confirmation of the euphoria that we normally see at a major market peak.

But, at the same time fears of a recession has exceeded and the probability of it happening have gone up to the highest level since August 2009, said the note.

As many as 28 percent of investors expect the global growth to weaken over the next 12 months, which marked an improvement of 20 percent pts compared to August's reading.

Given the weak growth outlook, 45 percent of investors expecting corporate profits to deteriorate over the next 12 months. “Regarding recession expectations, 38 percent of the panel think a recession is likely in the next 12 months, while 59 percent think it is unlikely. This is the highest recession probability since August 2009,” said the report.

The note also highlighted that fund managers increased their equity allocation in September, up +8% pts to net 4 percent, but it is still underweight.