Global fund managers no longer ‘apocalyptically bearish’, increase stock allocation, trim cash

Global fund managers have scaled back their pessimism on stock markets and now foresee slightly better days ahead for the asset class, Bank Of America’s (BofA) Global Fund Managers survey showed. “Sentiment remains bearish, but no longer apocalyptically bearish as hopes rise that inflation and rates shock end in coming quarters,” the monthly survey showed. However, the Bull & Bear indicator of BofA stays at max bearish with no immediate reversal in sight. In the previous survey, BofA had highlighted that equity allocation by fund managers was at a new low since the Lehman crisis.

Cash levels up from lows, equity allocation increased

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Meanwhile, equity allocation was seen rising higher from the dire lows of last month. “FMS equity allocation increased 18ppt MoM to net 26% underweight this month. The current allocation is 2.2 stdev below its long-term average,” the survey showed. During the previous survey, equity allocation was worse than it was during the Lehman crisis.

Allocation breakdown

Clearly equity as an asset class is back in favour with fund managers as investors are once again net overweight equities compared to bonds. With equity allocation rising from lows, fund managers’ allocation to US stocks increased by 15% from the previous month to now stand at a 10% overweight position. It was also for the first time since August 2020 that fund managers have backed Growth stocks to outperform Value over the next 12 months.

Talking sectors, the technology space saw the highest allocation on-month basis along with discretionaries. Investors are moving out of staples and utilities. Overall, healthcare is the most favoured space for investors now accompanied by technology — aided by the recent jump in allocation. Investors are bearish on discretionary items, utilities, and banks.

Inflation still a risk

Inflation has mellowed down but fund managers continue to see high inflation as the biggest tail risk, according to the fund manager survey. Net 39% of the respondents see inflation staying high as the risk followed by 24% seeing recession as the biggest concern. “The net % of investors that think the global economy will experience recession in the next 12 months continued to rise to 58% (from 47%), the highest since May 2020.”

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Up from last month, now fund managers see a slightly better picture when it comes to global growth. “August also saw the net % of investors expecting ‘profits to deteriorate’ ease from last month’s all-time high,” BofA said.

BofA remains bearish

Although the FMS shows bounce back in sentiment among investors, BofA said they remain patient bears. Their base case calls for rates to rise and profits to fall. The global brokerage firm has pinned a target at 4328 for S&P 500, which if scaled, BofA would take profits.