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Fund Managers: Hopeful on Inflation, Defensive

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As exemplified in an earlier article, Bank of America’s monthly Fund Manager Survey (FMS) is an interesting sentiment monitor of what the world’s most enduring investor class thinks of the macroeconomic/market scenario in play. In this month’s survey, the results of which were released on the 16th of August, 250 participants representing $752 billon in Assets Under Management responded the surveyors’ questions.

The most interesting outlook being presented shows that the survey participants don’t expect sky-high Consumer Price Index (CPI) trajectories on a global basis while not expecting short-term rates to drop any time soon.

Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

It’s an interesting juxtaposition of outlooks which could be interpreted thus: while inflation is not expected to continue increasing, it’s also being considered enough to expect bond rates to continue rising. When bond rates rise, equity flows decrease – leading to lower market valuations and a continuation of the present-day bear market.

Given that recession is the second half of the inflation/recession cycle, the number of participants deeming an recession as being likely has increased since the past month’s survey.

Another aspect exhibited in the FMS is the growing investor sentiment about companies’ balance sheets as expectation of a recession grows.

Top investors want companies to prioritize the strengthening of balance sheets over increasing capital spending and share buybacks. The share buyback phenomenon, which has increased in several top companies over the course of this year, has been a contributory factor in the momentum seen in leading stocks/sectors. Whether company management heeds this, of course, remains to be seen. If a course correction were to happen, a further deepening of the bear market can be expected.

As highlighted in a past article, infrastructure spending is a key component of the Chinese economy, despite the growing number of ghost cities and infrastructure facilities. Due to events over the past couple of months, a crash in China’s real estate sector has emerged as the most likely factor for a “credit event”, i.e. a debt crisis which could accelerate a market crash.

Meanwhile, cash levels – equities held by institutional investors for quick conversion to cash via sales as opposed to mid- to long-term holdings – have slightly lessened (by 0.4%). At 5.7%, it still remains well above the long-term average of 4.8%.

Another interesting aspect has been the flight of capital towards the US dollar. Despite this being touted in many media outlets as a proof of resilience of the US economy, there has been a slight increase in top investors’ assertion that the US Dollar is a “crowded trade”. A “crowded trade” implies overvaluation and heightened vulnerability to shocks.

Given that this is a survey, the framing of questions as well as the “Big Picture” is important. For instance, top investors collectively assert that their positions in “defensive stocks” are no longer “overweight”, i.e. a cause for outsized negative impact from a risk management perspective.

At the same time, FMS participants also indicate that “growth” stocks will outperform “value” stocks over the next year for the first time since August 2020.

This might be considered “mixed signalling” until the net positioning history is revealed. As per this metric, top investors declare that they are short tech and discretionary stocks – the standard bearers for “growth” stocks.

“Cash” remains king even in this past month, indicating that top investors are still ready to take flight.

The “mixed signalling” is given further context when considering the type of stock that will find favour: it is increasingly becoming important for companies to announce high quality earnings. All other considerations, such as high dividend yield, low volatility and market capitalization are becoming increasingly less relevant.

The increase in conviction in the “quality” of earnings as well as the conviction in high momentum overcoming low momentum indicates an effective “passing of the baton” for interest in well-managed companies with a robust balance sheet driving trajectories. This would mean that most of the “high-conviction” stocks favoured by retail investors will see significant churn and drawdowns. Once again, this indicates the superiority of a tactical investing mindset over a “passive” long-term holding strategy.

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