Trade war still investors’ top concern
In Bank of America Merrill Lynch’s February 2019 survey, trade war concerns remained the top tail risk cited by global fund managers for the ninth consecutive month. The percentage of investors citing it as the top risk rose by two percentage points from January to a net 29%.
The trade negotiations are still ongoing between the US (DIA) (SPY) and China (FXI) and there is still uncertainty if a trade deal can be reached by the March 1 deadline. Lately, President Trump has indicated that the deadline could be extended if he feels that the trade deal is close enough. While China has already offered to buy more US goods to plug its trade surplus with the US by 2024, there are issues related to intellectual property and technology transfers that are more sensitive and could take much more time to sort out. In the meantime, investors remain worried about the future prospects.
China’s slowdown remains one of the biggest sources of fear among fund managers with 21% of the managers citing it as the top risk. All the new economic data that has come out of China points to a deepening slowdown. The country’s import and export data for December significantly weakened year-over-year. Inflation indicators, including the consumer price index and the producer price index, also showed deceleration. Chinese equity markets (BABA) (BIDU) fell almost 25% in 2018 compared to the S&P 500’s fall of 6.3%.
Corporate credit crunch
A total of 12% of fund managers felt that the corporate credit crunch would be the biggest tail risk. The so-called bond king, Jeffrey Gundlach, has also warned about the risk of downgrades in corporate debt. As we highlighted in Why Gundlach Expects a Wave of Corporate Downgrades to Come, he used a historical leverage ratio analysis to highlight how large a portion of BBB-rated bonds (BND) would be junk (JNK) right now. As reported by Yahoo finance, Gundlach said, “Actually, 45% of the entire investment grade bond market would be rated junk right now…based on leverage ratios. Forty-five percent.”