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Every month, Bank of America (BofA) conducts a Fund Manager Survey (FMS) that polls major institutional investment managers to establish a running gauge of how the world’s most enduring investor class is evolving in terms of both macroeconomic and market outlook. The latest survey took place between 8th of July and the 15th and polled 293 panelists with $800 billion in Assets Under Management (AUM). The results were released on the 19th and, so far, paints a picture that is both the strongest and the least ambiguous so far this year.
Right at the outset, the survey’s panelists now have a consensus opinion: a very strong expectation of recession.
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
The panelists strongly disagree that corporate profits can be expected to improve in the near future:
As confirmed by trends in bond yields in a recent article, most panelists don’t expect to find higher yields in long-term bonds.
In an interesting development, cash levels held by FMS panelists have, on average, been the highest since 2001. «Cash», in this case, refers to equities held by institutional investors for quick conversion to cash via sales as opposed to mid- to long-term holdings. The tax liability is potentially higher in «cash» but lower in long-term holdings.
The most crowded trades – and by extension, the most volatile and overvalued – have seen a substantial change relative to the previous month’s survey results. The US Dollar is now the most crowded while fewer panelists think oil/commodities is. Fewer panelists consider US treasuries to be relative unattractive, despite lower yields expected. Interestingly, a small number of panelists are showing signs of souring on Chinese stocks. This might increase in the coming months for reasons expounded upon in last week’s article.
There’s an interesting trend in the panelists’ perception of risk. While most panelists disagree that they’re taking higher than normal risks, BofA points out that fewer panelists had disagreed at a time when Lehman Brothers – a prestigious and historic investment management firm – had gone under in 2008. Given the expectation of a recession, the high cash levels and low expectations on long-term bond yields, the underlying message is that this perception might be flawed.
Interestingly, this perception is also supported by the self-declaration that they’re not overweight on equities as opposed to cash. Note: «Overweight» here means whether they consider their position in an asset class having a disproportionate risk contribution to their portfolio.
In terms of positioning, these perceptions are negated by the overall change in market focus: the panelists are short global equities, eurozone and tech stocks while they’re substantially long on cash and consumer staples.
The expectation of a disproportionate positive effect is being reposed in cash, alternatives and commodities. Meanwhile, equities and bonds are considered to be the most problematic.
It bears remembering that fund managers cannot unilaterally change their portfolios’ asset mix; they’re expected to – at least broadly – build strategies around their clients’ expectations. However, the relationship between manager and client is a two-way street: when the former gets more bearish on an asset class, subsequent interactions with clients will enable them to form the change in asset mix for their portfolios to be more in line with their expectations.
As BofA’s strategists revealed in a note after the release of the survey’s results to the bank’s clients, “Everyone is bearish but no one has sold», adding that for every $100 of inflows since January 2021, just $2 have flowed out from tech stocks and $3 exited from equities overall. The strategists also warn that “flows are starting to catch up with sentiment”.
Given that holdings in «cash» indicates a preparedness to generate profits in the shortest possible time and the fact that long-term holdings in equities generally causes a lower tax effect than short-term holdings, it’s very possible that major institutions are looking to sell off a portion of their holdings. Meanwhile, other sources report that retail investors (also known as «individual investors») have continually bought into U.S. stocks.
This week will see 35% of all the constituents of the S&P 500 – translating to nearly 49% of the index’s market capitalization – publishing their earnings updates. Now is the time, more than before, for retail investors to consider a paradigm shift on the means adopted for making profitable investments.
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