Investor Confidence Hits Financial Crisis Low say Bank of America as Others Forecast Gold Price Rally

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- Bank of America survey shows outlook for growth, profits deteriorating.

- Tariffs, Fed policy, stock market declines see institutions turn cautious.

- Survey sees Capital Economics forecast gold price rally for 2019.

Optimism among institutional investorsabout the outlook for economic growth and corporate profits has reached their lowest levels since the aftermath of the financial crisis, according to the latest issue of the influential Bank of America Merrill Lynch Fund Managers Survey. 

Global growth expectations slipped to their lowest level since November 2008, which was barely two months after the collapse of Lehman Brothers, at the start of October. 

A total 85% of investors surveyed said they think the global economy is in the late stage of the current cycle, which means they suspect the "bust" stage of all cycles may not be far off. And a net of 38% of investors said they expect global economic growth to slow over the coming year. 

This ties with the survey responses covering the outlook for corporate profits the world over, with a net 35% having told the Bank of America  team they expect earnings growth to be in the single digits next year. This is a reversal of the net 45% who said back in February that earnings would grow strongly, by double-digit numbers, during 2018. 

Moreover, a net 20% of respondents said they actually expect corporate profits to fall over the coming year, also marking a complete reversal of the situation prevailling back in February when a net 39% said they were looking for improvement. 

"When asked how the global economy will develop over the next year, net 38% of respondents expect deceleration, the worst outlook on global growth since Nov. ‘08," the survey report reads. "Fund Manager Survey investors think the USD is very overvalued, notably against EM currencies which are seen as never having been more undervalued in survey history."

The survey responses are telling because the answers reflect the views of more than 200 institutional money managers who have a combined $635 billion of assets under management. Those are all institutions whose trading and investment helps to set financial market prices the world over. 

Bank of America says the most recent responses do not point to anything other than some volatility in "risk assets". But with a litany of risks to the global economic outlook, as well as financial markets, prominet in the minds of investors heading toward year-end the details of the latest survey appear ominous. 

"There is a growing sense that the cumulative effects of monetary tightening in the US will soon take a toll on activity. Indeed, the latest Bank of America Merrill Lynch survey of fund managers shows that investors are the most bearish on the global economy since the global financial crisis," says Simona Gmbarini, an economist at Capital Economics. "We expect the gold price to increase further in 2019 on the back of stronger demand for safe-haven assets." 

After all, President Donald Trump's tax cuts have enabled the U.S. economy to outperform all of its rivals in 2018, but the effect of those is widealy expected to wear off over coming quarters. This is just as the impact of his tariffs levied against Chinese goods are expected to really begin stoking cost pressures and supply chain disruptions in the U.S.

The anticipated 2019 slowdown in U.S. economic growth will come as China, the world's second largest economy, grapples with the fallout within its own borders from those same tariffs. 

Already Chinese industrial production growth has declined from 7.2% in February, the month before White House tariffs on Chinese steel and aluminium were announced, to just 6% in July when the levies were actually implented. 

Meanwhile, fixed asset investment growth has slowed from 7.9% to just 5.5% over the same time period. The latest numbers covering September will be released on Thursday 18, October, alongside GDP data for the third quarter.

Consensus is for Chinese GDP growth to have slowed from 6.7% to 6.6% during the three months to the end of September, although some analysts forecast a continued slowdown once into the New Year if the government does not use fiscal stimulus to stave off a further deceleration. 

The net effect of all this is that once into 2019, both the U.S. and Chinese economies could well begin to wobble, which means countries accounting for nearly one third of world economic output will be fighting a slowdown.

That would hardly be an environment that is conducive to anything other than more outperformance by the U.S. Dollar and bond prices in 2019, which tend to rise whenever the global economy wobbles and as investors become more risk-averse. 

"What’s more, we expect the support to gold from safe-haven flows to continue given lingering global trade worries and our forecast of a further 10% drop in the S&P 500," says Gambarini. "With this in mind, we think that gold will rally further next year. Our end-2019 forecast is $1,300 per ounce."

The price of gold futures was quoted 0.11% higher at $1,226 Wednesday.

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