Investors haven't been this scared about the state of the global economy in nearly 7 years

Key Points
  • Pessimism about the global economy is at its highest point since December 2011, according to the Bank of America Merrill Lynch Fund Manager Survey for September.
  • Those worries have translated into changes in portfolio allocations, with cash at an 18-month peak.
  • Still, investors made U.S. stocks their most favored spot for the second month in a row.
Gabriel Bouys | AFP | Getty Images

As the trade war between China and the U.S. hits a boiling point, investors are taking their dimmest view of the global economy since the height of the European debt crisis.

The tariff tensions aren't the only thing bothering market pros: They also see rising risks from both a general slowdown in China as well as central banks finally shutting off the monetary spigots after years of ultra-accommodative policy.

Broadly speaking, pessimism about the global economy is at its highest point since December 2011, according to the Bank of America Merrill Lynch Fund Manager Survey for September. A net 24 percent expect global growth to slow down over the next 12 months, a steep rise from the net 7 percent the month before.

The fears are showing up in portfolio movements. Cash is at 5.1 percent, the highest allocation in 18 months.

"Investors are holding on to more cash, telling us they are bearish growth and bullish US decoupling," Michael Hartnett, chief investment strategist of BofAML, said in a statement. "Fund managers are signalling that they are starting to price in a hawkish Fed."

The movement to cash and equivalents has been significant.

Money market funds were holding $2.84 trillion through July, an increase of 7.1 percent from the same point a year ago, according to the Investment Company Institute. Taxable bond mutual funds had assets of $3.46 trillion, a 12-month rise of 5.7 percent.

The "decoupling" reference is about how the U.S. has managed to maintain economic growth levels above most of the developed world. GDP rose 4.2 percent in the second quarter, and the Atlanta Fed projects a 4.4 percent increase in the third quarter. CNBC's Rapid Update economist survey, however, points to a more subdued 3.2 percent increase.

A net 48 percent of respondents think the decoupling trend will stop because the U.S. economy will decelerate in line with its neighbors. Part of that trend is centered on the belief that the Fed will continue raising interest rates amid concerns that growth and inflation could be getting out of hand.

However, that hasn't necessarily soured investors on U.S. stocks.

Allocation to the American market rose by 2 percentage points to a net 21 percent overweight, the biggest reading since January 2015. U.S. stocks were the most preferred global market for the second month in a row; allocation to global stocks fell to near an 18-month low.

That comes even though the biggest fear, cited by 43 percent of respondents, is the trade war. The U.S. and China are amid a back-and-forth battle that has seen the White House order 10 percent tariffs on $200 billion in Chinese goods and China retaliating with $60 billion worth of duties set to go into effect next week.

A China slowdown was cited by 18 percent of respondents, while 15 percent cited "quantitative tightening," a reversal of the program of quantitative easing.

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