Swelling corporate debt piles are now global fund managers’ major concern

REUTERS/Kham

• Around one quarter, 24%, of global fund managers expect
  corporate bonds to be the worst performing asset class in
  2019.
• The latest survey by Bank of America shows more fund
  managers want to see companies use capital to strengthen their
  balance sheet.
• While global growth expectations have fallen to the
  lowest level since the financial crisis, only 11% of fund
  managers forecast a global recession in 2019

Rising levels of corporate debt are well and truly on the radar
of global fund managers, and that doesn’t bode well for global
stocks.

US corporate debt levels have now risen to a record-high 46% of
GDP, according to the latest Bank of America survey of global
fund managers.

The past decade has seen a sharp rise in corporate debt issuance,
as investors hunt for yield in a low interest rate environment.

There are now concerns that more debt has been issued has been
issued on increasingly looser terms, known
as “covenant-lite” arrangements.

And the Bank of America survey shows a degree of concern among
fund managers, most of whom would rather see companies use
capital to strengthen their balance sheet rather than invest in
new projects:

BAML global equities vs
bonds
Bank of
America

As the chart shows, when the focus shifts to reducing leverage,
global equities also fall.

A record-high number, 33%, of fund managers in the November
survey also thought company payout ratios (e.g. dividend
payments) are too high, “reflecting concern about US corporate
debt”.

And around one quarter, 24%, of investors expect corporate bonds
to be the worst performing asset class in 2019.

Elsewhere in the report, there were mixed signals from fund
managers about the investment outlook over the next 12 months.

Expectations for global GDP growth are now at their lowest level
since November 2008, which is when the global financial crisis
reached its apex following the collapse of Lehman Brothers two
months earlier.

And in line with the recent pull-back in US tech stocks — which
have been a key driver of US markets in recent years —
allocations to the global tech sector fell to the lowest level
since February 2009.

While that all sounds pretty bearish, the fund managers surveyed
aren’t predicting an imminent market collapse.

Just 11% respondents expect the global economy will tip into a
recession next year:

Bank of America recession
chart
Bank of
America

And following the October selloff on global stock markets, cash
levels dropped from 5.1% to 4.7%, indicating that investors took
the opportunity to increase their exposure to US and emerging
markets stocks.

And the majority of respondents still think the S&P500 will
peak above 3,000 — a premium of around 12% to current levels.

However, 30% of the fund managers surveyed now think US stocks
have peaked, which is around double the previous month’s total,
16%.

Looking ahead to 2019, investors said the best-performing asset
classes are likely to be non-US equities, 45%, and the
S&P500, 17%.

The latest Bank of America survey was carried out from November 2
to November 8. 225 panelists with a collective total of $641
billion under management participated in the survey.