Global Fund Managers: More Bearish Than EVER

For its September update of its iconic Fund Manager Survey (which has been covered before), Bank of America, 212 panellists managing $616 billion in Assets Under Management (AUM) participated and provided some fascinating (and prescient) insight.

Over the past two months, the percentage of respondents expecting a weaker economy in the next 12 months has increased by 5% since the last survey.

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“Stagflation” expectations, i.e. below-trend growth and above-trend inflation, are now at a record high.

With regard to the Eurozone, the survey records a recession to be most likely as a result of the energy crisis (as predicted in previous articles).

Now, over in the US, the Fed Rate hike is pinned as a major influence on market direction: the higher the rates, the lower the market goes. The survey was held a little before the current 75 bps rate hike was done to bring the rates to the 3% to 3.25% range. A majority of the respondents indicate an expectation of the rate to go even further to the 4 – 4.25% range.

An overwhelming majority of the respondents expect this to happen all through 2023, with the largest set of expectations at the Q1 and Q2 periods.

The survey respondents also reported their asset allocation to stocks at all-time lows. It bears noting that “allocation” here means a long-term conviction that holding on to the asset is a “value builder”.

In terms of stock holdings, however, survey respondents indicate that they’re increasing their holdings in “defensives”, i.e. utilities, staples and healthcare stocks.

Outside of equities in general, two sectors/supersectors considered to perform especially badly would be both Eurozone and tech stocks (i.e. generally, the likes of Apple and Google).

As of right now, the US 2-Year Treasury bond yields a better return than the S&P 500. Despite this, in a report released by the same team subsequent to the FMS, BofA indicates that current outlook for the bond market is a record third instance of a “bond bear market” expected to last until 2024. The primary reason for this is that bonds deliver inflation-beating returns. Even at current yields relative to the US market, these returns are not being considered to be strong enough returns to beat the net effect of inflation.

Last week, Mr. Jurrien Timmer, Director of Global Macro at Fidelity Management Research (FMR), made an interesting estimation: after the FOMC update was delivered, the forward-looking fair value for the S&P 500 dropped to 14X Forward Earnings Per Share (EPS) that day, which was 15% below that day’s level. If earnings growth ends up being flat (at $219) instead of growing +10%, fair value declines by 36%.

Mr Timmer further stated that equities have seen little outflow, and money markets have seen very little inflow since February 2020. While bond funds & ETFs have seen more material outflows, investors will capitulate and start exiting if the stock market goes down to 3500. The 3500 level is around 5% away from the current day’s level.

Goldman Sachs also indicated last week a familiar theme from earlier articles: the price ratio multiples are rapidly crumbling, as exemplified in the downward trend in the S&P 500’s forward multiples.

Furthermore, Goldman Sachs estimates that there will be no GDP growth in the US for the calendar year 2022 while 2023 might see a 1.1% increase.

With regard to the S&P 500, Goldman Sachs also had a similar assessment: the index is expected to end 2022 roughly 1.6% away from the current day’s level in a “soft landing” scenario and at 3400 in the “hard landing” scenario. Both scenarios see a recovery in 2023 which would still be far below highs seen earlier this year.

Researchers at Citi warned last week that the Eurozone, Brazil and Canada will be entering recessionary periods in Q4 or shortly thereafter.

The researchers, interestingly, estimate the U.S. to be entering a “recessionary period” from Q3 of 2023 onwards, while Germany and UK are both indicated to already be in recession.

Also interesting is the conclusion that China isn’t in recession. While it’s entirely conceivable that the Chinese government will be loathe to declare it, estimates from its own Customs Bureau indicate exports to the U.S. (one of its largest trading partners) shrinking as consumption outlook diminishes. Infrastructure and exports are two very important pillars of the Chinese economy. However, it’s possible that there isn’t nearly enough reliable data right now for the researchers to make any prognostications about China.

Also, a report from Deutsche Bank last week indicates that its homeland Germany will likely be bearing the brunt of GDP shrinkage in the Eurozone in the next year.

The sampling of outlooks offered via the likes of Bank of America, Fidelity, Goldman Sachs, Citi and Deutsche Bank are neither a sea change from opinions offered in earlier months nor limited to these companies alone’ most reports published by leading institutions have been grim for the past 2-3 months offered above. Given that the year is three-quarters done, the conclusions arrived at are getting more and more concrete. For investors continuing to buy into the idea of an upward swing in market valuations, the warning most suitable would simply be: “Caveat emptor!”

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