By Helen Reid
LONDON (Reuters) - Investors' concerns about company leverage hit a ten-year high as they continued to position against the risk of a global trade war, Tuesday's Bank of America (NYSE:BAC) Merrill Lynch's January fund manager survey found.
Fund managers named the dollar as the most crowded trade - ahead of tech stocks - for the second month running, while the trade war scenario topped the list of biggest tail risks for the eighth straight month.
The dollar is seen as the most overvalued since 2002, BAML strategists wrote. The currency was among the best-performing assets globally in 2018, pushed up by U.S. fiscal stimulus and higher tariffs.
Corporate indebtedness, meanwhile, was the chief concern among fund managers for the first time since 2009, the survey found, with a net 48 percent of fund managers believing company balance sheets are overleveraged.
Investors have become reluctant to put money into highly leveraged companies as rising interest rates impact refinancing costs.
Investors reported their worst outlook on global profits since 2008, with a net 52 percent expecting a deterioration in the next year.
Growth expectations also fell: a net 60 percent of investors surveyed think global growth will weaken over the next 12 months, the worst outlook since July 2008.
But investors are pricing in "secular stagnation" rather than a fully-fledged recession, BAML strategists said, as fund managers add risk via tech stocks and emerging market assets. Only 14 percent expect a global recession this year.
"The good news was inflation expectations plunged, allowing investors to discount a new dovish Fed and a ...steepening of (the) yield curve," the strategists said.
They said contrarian themes and trades for January for investors keen to swim against the current would include buying cyclical leveraged stocks, emerging currencies, U.S. industrials and small caps, and European stocks.
(GRAPHIC: Most crowded trade - https://tmsnrt.rs/2AKbOji)
EUROPE, UK STILL OUT OF FAVOR
In Europe, growth outlooks and equity allocations both hit seven-year lows, BAML's survey of European fund managers showed.
UK stocks remained the least favored by both global and European investors, with a net 39 percent of the latter intending to be underweight the region over the next 12 months.
"Brexit uncertainty increases as we move closer to the deadline, resulting in the highest proportion of fund managers saying sterling is undervalued in the 17 years of the survey," wrote strategists.
With a slew of bad news for the autos sector recently, European investors' allocations to car stocks hit their lowest in eight years.
European fund managers have also grown more defensive, with positioning in cyclical versus defensive sectors at its lowest in three years, BAML said.
(GRAPHIC: Biggest tail risk - https://tmsnrt.rs/2ALTmGG)