BAML survey - Risk concerns focus on trade wars and tech

The BAML Global Fund Manager Survey provides good insights on where are the major concerns for investors through its biggest tail risk and crowded trade charts. Risk represents the unexpected downside from surprise events or news, but risk can also be right in front of us as measured by investor perception and crowding. We may fully recognize risks, but still not be ready for when the shock occurs. 

However, the risks from a focused tail risk and crowdedness are fundamentally different. Crowdedness is focused on the reversal of expectations.  The tail risk  survey often focuses on not knowing what will be the market response.  Expectations are unclear.

The BAML survey puts trade wars as the key investor risk, but if you ask investors how this will play out in markets or how markets will react to a change in trade negotiations, the results are less clear. The impact channels of a trade war through economy are hard to measure. What does it mean to have a trade deal? Yes, uncertainty will be reduced and there may be some obvious market responses for specific companies and sectors, but overall market direction is not immediately obvious. Will tariffs be lifted? Will intellectual property be protected? Will China increase imports significantly? Will there be a surge in China exports to the US? Will other US-China geopolitical tensions decline?  The answers to these questions are not clear Alternatively, if there is no trade deal, what is the next move by each player? Again, the right bets or reactions are not clear. The right hedge may be to just reduce risk.

For the crowded trades, the response is more obvious. Crowds turn on new information as one-sided expectations change. Here the bet is on reversal and the cost of waiting for the change. We know that crowd changes can lead to momentum crashes. Protective trades can be constructed because the potential risks are clearer. 

The key with using this survey information is to have a plan on taking advantage of the focus of other investors. Are you ready for changes in what is important to your fellow investors?