Risk of second coronavirus wave dents appetite for stocks, cash still king: Survey

Investors are bearish on stocks, especially riskier assets, and expect a slower economic recovery as the risk of a second wave of infections from the novel coronavirus persists, a BofA fund manager survey showed.

World stocks have bounced back by a whopping 31{b1ee4ac4d8d7b8e1af61a560a11ca52574b8103b547ccac8037ce0cdf9e7ba58} in less than two months from a March selloff, recovering more than half their losses, as investors bet that economic activity would rebound rapidly once lockdowns were eased.

But evidence of fresh coronavirus infections in some countries has dampened those hopes and BofA’s survey showed that a “second wave” was seen as the biggest risk to markets.

Investors also cited permanent high employment and the break-up of the European Union among the top risks. However, significant monetary and fiscal stimulus in the United States helped U.S. stocks outperform other markets.

As economic forecasts continue to deteriorate, May’s poll showed 75{b1ee4ac4d8d7b8e1af61a560a11ca52574b8103b547ccac8037ce0cdf9e7ba58} of respondents believe the recovery will be U or W-shaped. Only 10{b1ee4ac4d8d7b8e1af61a560a11ca52574b8103b547ccac8037ce0cdf9e7ba58} of the 194 respondents were expecting a V-shaped recovery.

A V-shaped recovery is when a plunge in growth is followed by an equally sharp recovery; U-shaped is when recovery takes more than a couple of quarters; and W-shaped refers to a double-dip in growth.

Cash levels remained elevated at 5.7{b1ee4ac4d8d7b8e1af61a560a11ca52574b8103b547ccac8037ce0cdf9e7ba58}, well above the 4{b1ee4ac4d8d7b8e1af61a560a11ca52574b8103b547ccac8037ce0cdf9e7ba58} in February, as a big chunk of investors said they expect below-trend global growth and inflation in the next 12 months.

Other findings from the survey included that long U.S. tech and growth stocks were the “most crowded” trade for May, and that hedge funds were increasing their exposure to equities by 15 percentage points to net 34{b1ee4ac4d8d7b8e1af61a560a11ca52574b8103b547ccac8037ce0cdf9e7ba58} — the largest increase since June 2018.

On the bright side, risk of a “systemic credit event” – corporate credit defaults — collapsed to 8{b1ee4ac4d8d7b8e1af61a560a11ca52574b8103b547ccac8037ce0cdf9e7ba58} from 30{b1ee4ac4d8d7b8e1af61a560a11ca52574b8103b547ccac8037ce0cdf9e7ba58}.