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The Global Fund Managers Survey (FMS) by Bank of America is an interesting barometer for the sentiments of some of the biggest institutional players in the market (and which has received frequent attention in the course of our commentary over the past year or so).
In the latest survey, survey respondents indicate that their risk appetite remains depressed and not far from the extreme pessimism of 2022 and comparable to the levels of the 2009 Great Financial Crisis (GFC). A net 29% of survey respondents are “underweight” equities, down from 31% in March. Similarly, the growth expectations worsened to December 2022 levels with a net 63% expecting weaker global growth.
35% of the respondents opine that the Federal Reserve will start cutting rates only in Q1 2024 while 28% expect this process to start a quarter earlier. All in all, market sentiment effectively holds that the next quarter will be a wash.
Other salient points of consensus were:
84% of respondents contend that global CPI will be heading lower;
58% of respondents predict the prevalence lower short-term rates, which is the highest consensus since November 2008;
The biggest ‘tail risks’ to the global economy are bank credit crunch & global recession (35%) followed by high inflation that keeps central banks hawkish (34%);
Cash allocation has remained above the 5.0% tactical “buy” signal since November 2021;
Fears of a credit crunch has driven bond allocation among these institutional players up by 9 percentage points Month over Month (MoM) to a net 10% Overweight, which is the largest overweight metric since March 2009;
Survey respondents’ quoted underweight status in equities relative to bonds is now also at levels not seen since the GFC
Now, one key reason why fund managers have reported being “underweight” on equities has been that overall capital allocation has continued to favour holding equities. As of April, the FMS reported that U.S. tech companies are now more than 2 standard deviations away from the performance of the S&P 500.
This level of disparity was witnessed two times before: in 1970 and 2000. Shortly after reaching these highs, the tech sector took a drop (along with the rest of the market) and went on to significantly underperform for a decade afterward in both cases.
When bond discount rates are structurally increased, equity valuations become progressively more prominent for institutional investors. This becomes particularly relevant when fundamental growth, as highlighted by economic indicators, becomes stagnant. When investors realize that these highly-overvalued stocks are ultimately valued at massive multiples, their valuations are at a major risk.
In the weeks since the Survey was published, the U.S. stock market has seen a flight to broad-market funds by institutionals and money market funds by major investors. In both cases, tech stocks continually edged upwards and somewhat subsided in some measure, albeit with an upward trend. The most widely-read indicator is the earnings beaten which, however, comes with a caveat: analysts’ consensus on target earnings tended to be somewhat generous. When these heavily-discounted expectations were beaten, some market participants read this to mean outperformance. In reality, the hurdles were set too low.
Even in the week that has passed, Big Tech was the prime mover for the S&P 500 despite momentum continuing to dwindle:
On the tech-heavy Nasdaq-100 index, however, the momentum is a net negative on a week-on-week basis:
The net result from these two differing picture could be summed up thus: while there was indeed some single-name buy-in action among tech stocks, the bulk of market movement could be attributable to broad-market ETF buying behaviour by major players. In a market desperate for direction, this behaviour is likely being misattributed as bullish market signals.
Investors should be wary reading too deeply into the tea leaves. Sophisticated investors looking for tactical plays on the tech-heavy Nasdaq-100 can be consider the 5X ETP on the upside and the 3X Short ETP for the downside. Plays on the S&P 500 can consider the 5X ETP on the upside and the 3X Short ETP for the downside.
Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.
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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