Over the past few months, several articles referenced Bank of America’s “Fund Managers Survey”, which is a very revelatory document for fund managers’ sentiments about markets. However, this doesn’t necessarily translate into action: fund managers have a duty to inform their clients about their sentiments. However, this doesn’t mean clients are obligated to change their instructions. For a sense of change in instructions, examining the likes of “Flow Reports” that are either issued by the banks’ Macro Research Desk or their Prime Brokerage desks – which predominantly cater to the likes of hedge funds and wealthy investors – would be in order.
By the end of the month, JPMorgan indicated that bond portfolios have shown significant shrinkage over the years. At present, cash is king, instead of bonds.
It bears noting that the meaning of “cash” is different in the language of financial institutions. Holding an asset over the long term generally implies some tax advantage. A short-term holding, on the other hand, has greater tax implications. An intent to capitulate a position (basically “sell”) is known as a “cash position”.
The overall positioning in bonds shouldn’t be all too surprising. As Morgan Stanley indicates, bonds were increasingly unattractive to individual investors since the end of 2008 Financial Crisis.
The primary players in government bond markets have largely been reduced to foreign central banks (who tend to stock up on US Dollars and Treasuries to build up their foreign currency reserves), mutual funds and insurance companies. As a result, bond traded volumes relative to outstanding US Treasuries (as indicated in the top half of the image above) has seen a significant decrease in the present day.
As a result, JPMorgan indicated that market depth – a signal for how active bond markets are – for the highly-popular 2-Year and 10-Year Treasury Bonds (also referred to as “Cash Bonds”) had almost completely evaporated in the present day.
Since bonds have basically no takers among individual investors (and indeed, many hedge funds) and even major institutional investors typically go no more than 15% in total holdings, the argument could be made that this has benefited stock trajectories. While this might have been true in the years following the Financial Crisis, this has not been true in the present day.
Morgan Stanley indicated that total exposure by its clients to “single names”, i.e. stocks themselves, are at Year to Date (YTD) lows as of the end of September.
Incidentally, as of last week, the “classical” model of the 60/40 Portfolio of the S&P 500 vs US Bonds was down 21% in 2022, which meant that the current year will be the 2nd worst year in history for this style of portfolio after 1931.
Since the stocks’ valuations are trending downwards, the dominant argument would be to go short stocks. As it turns out, Morgan Stanley indicated that their clients are showing an increasing preference for shorting the entire market via ETFs over “single names”.
This is a supplementary sign of the overall outlook by high-volume/high-value investors expecting a recession. The argument is that in times when public consumption decreases, only large companies or companies with robust fundamentals are likely to perform.
The primary sign of an outlook expecting a recession is a shift towards holding defensive stocks, which was indicated as being most favoured in last month’s article that discussed September’s Fund Manager Survey. As it turns out, this is exactly what high-net worth clients did throughout September.
This might bring about a question in most investors’ minds: if the recent CPI numbers exceeded market consensus, what might be the reason for the rally going on since that has carried over into this week (so far)? There are two attributable reasons:
Overall, the trends of the current week might not be the upswing many investors are hoping for.
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Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.
Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.
Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.
Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.
Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.
Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.
Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.
Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.
For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.
Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.
He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.
Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.
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