Are you feeling clueless?
Has the seven-year bull run in equities left you feeling nervy in the face of a potential rate hike in the U.S. and weakening growth in China? You are not alone.
The results of a client survey released by the Swiss bank Credit Suisse on Thursday highlighted that global investors were feeling “lost and bearish.”
“This is the first time that we have come across so many people who say they are completely ‘lost’ in the current environment,” a team of research analysts at the bank, led by Andrew Garthwaite, said in the note.
“We met with many clients in the U.S., Europe and Asia. The wall of bearishness was extreme in the U.S. – roughly 80 percent of meetings,”
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“In our investor survey…respondents were almost the most negative on the growth outlook than they have been at any other time since we started the survey,” Credit Suisse said.
China and emerging markets were identified as the main source of growth weakness but it also signaled “increasing concerns” about an inventory-led soft patch in the developed world, in particular the U.S.
China hard landing
A perennial and the number one topic in every client meeting, according to the Swiss bank. As well as concerns over a potential property bubble and weakening growth, clients focused on the yuan.
“Many clients continue to believe that the currency is the critical barometer. If the RMB is allowed to fall again, many believe it would be highly deflationary and a sign that the leadership has lost control. Most clients believe that the currency will eventually fall significantly”, the bank said.
Credit blowing out
The research notes that high-yield credit spreads have been widening, worrying a “large number of clients” who believe it is always the “canary in the coal mine” of a major shift in sentiment.
New stats from Bank of America Merrill Lynch Friday showed that this fear might be overdone. It stated that last week’s inflows into high-yield bonds were at their largest in 8 months, thus meaning spreads have been tightening.
A Fed mistake
Around two thirds of clients believed that a rise in benchmark interest rates in the U.S., in the current environment, would be a policy mistake.
“Most clients acknowledged that the Fed communication has been confusing recently and thus the chance of the market misunderstanding Fed policy was higher than usual,” Credit Suisse said.
Another concern was the belief that central banks were fast running out of weapons and quantitative easing had failed to boost inflation. Credit Suisse countered this, however, arguing that disinflationary pressures from China, disruptive technology and the internet, cannot be addressed by monetary policy.
Global reserves falling
Global foreign exchange reserves have fallen by around $0.5 trillion since their peak, according to Credit Suisse, with central banks dumping dollars to protect their own currencies.
“Many clients claim that this is a bear signal and is, in effect, monetary tightening,” Garthwaite and his team said in the note.