As the International Monetary Fund drastically cut its economic growth forecasts yesterday (April 14) and issued a hugely grim outlook, figures also emerged showing the extent of investor fears about the deepening impact of the coronavirus outbreak.

According to Bank of America Merrill Lynch’s April survey of fund managers, cash levels have soared to 5.9% (from 5.1% in March and 4% in February) to their highest since the September 11, 2001 terrorist attacks in the US.

Fund managers are now underweight across all the main asset classes cited in the survey; equities, bonds, real estate and commodities. Understandable, perhaps, given that a record net 93% of poll respondents believe that there will be a recession in the next 12 months.

The grim outlook tallies with a plunge in the IMF’s baseline GDP growth forecast in April to –3% for 2020, a shocking downgrade of 6.3 percentage points from the 3.3% prediction in January this year. Emerging Asia posted a similarly steep fall, from a projected 5.8% expansion for 2020 to 1.0%.

"DEEP RECESSION"

Globally, such an outcome would mean the Covid-19 lockdown has sparked the worst recession since the Great Depression in the 1930s, and one far worse than the global financial crisis, wrote Gita Gopinath, the IMF’s chief economist in an article released yesterday.

Gita Gopinath, IMF

Indeed, the coronavirus could cause a drop in global GDP of between 10% and 15% in the second quarter of 2020, Keith Wade, chief economist and strategist at UK asset manager Schroders, said in a research note yesterday.

“We’re talking about a deep recession,” he added. “It will probably be the deepest recession that we have had since World War II.”

That would help explain fund managers’ mass exit from stocks. Their equity allocation plummeted 29 percentage points from March to a net 27% underweight, its lowest since March 2009.

Meanwhile, their allocation to bonds remained steady at net 28% underweight, real estate fell 8 percentage points to a net 5% underweight, while the underweight to commodities deepened to net 9% from a net 6%.

Sector-wise, fund managers have rotated heavily out of cyclical stocks into defensive ones, the BAML survey shows. Their allocation to energy is at a record low, while that to healthcare is at a record high.

Regionally, the allocation to emerging market equities saw the largest drop, falling 11 percentage points month-on-month to a net 6% overweight. That saw the US again become the most favoured region, climbing 12 percentage points to a net 15% overweight. 

MORE TROUBLE AHEAD?

Yet there may be even more trouble ahead. The IMF sees the potential for an even greater downturn than stated in its baseline scenario.

“The pandemic may not recede in the second half of this year, leading to longer durations of containment, worsening financial conditions, and further breakdowns of global supply chains,” wrote Gopinath.

“In such cases, global GDP would fall even further: an additional 3% in 2020 if the pandemic is more protracted this year, while, if the pandemic continues into 2021, it may fall next year by an additional 8% compared to our baseline scenario.”

Keith Wade, Schroders

Given that the major central banks have very little left in their armoury to soften such blows, that would be a stark outcome indeed.

“Policymakers have indicated that they would not want to cut interest rates below zero because of the negative effect that it would have on the banking system,” said Schroders’s Wade.

They could broaden the range of assets that they are buying, he suggests, noting that the Bank of Japan is even buying equities through exchange-traded funds and real estate investment trusts.

Wade added, however: “I am not sure how comfortable other central banks would be with that – it raises all kinds of corporate governance problems.”

What’s more, at some point monetary authorities will have to account for their huge spending outlays.

As Joachim Fels, global economic adviser at Pimco, wrote in a note published yesterday: “Higher fiscal deficits and debt levels could cause concerns about fiscal sustainability and, if fiscal policy stays expansionary after the pandemic is over, may also lead to higher inflation.”

It is little wonder that investors are bracing for the worst.