The latest Fund Manager Survey (FMS) indicates a shift in sentiment and positioning among investors. Key takeaways include:
1. Market Sentiment: The FMS data shows the least bearish sentiment towards financial markets (FMS) since February 2022. Cash holdings have dropped from 5.3% to 4.8%, marking a 21-month low. Three out of four investors anticipate a soft landing or no landing at all for the market. This suggests a relatively positive outlook for risk assets in the first half of next year.
2. Equity Allocation: Investors are displaying a reduced underweight (UW) stance towards equities, with the smallest underweight position since April 2022. Additionally, the allocation towards technology stocks has reached its largest overweight (OW) level since December 2021, indicating strong bullish sentiment in this sector.
3. Macro and Policy Outlook: Global growth expectations have improved, though they are still negative, with 4 out of 10 investors considering a recession to be “unlikely” (compared to just 1 out of 10 in November 2022). Earnings per share (EPS) optimism is at its highest since February 2022. Despite stimulative US fiscal policy similar to the peak of the Covid pandemic, expectations for lower interest rates are now at their highest since November 2008.
4. Risk Factors: A cash allocation below 5% signifies the end of the contrarian “buy signal” from the BofA Global FMS Cash Rule. The most significant “tail risk” identified is ongoing inflation leading to hawkish central bank policies. The potential for a “credit event” is perceived as most likely in US/EU commercial real estate at 45%, while China’s real estate sector is seen as less risky at 15%.
5. Asset Allocation: Investors are shifting away from cash and real estate investment trusts (REITs), resembling levels seen during the Global Financial Crisis (GFC) and Lehman collapse. The focus is turning towards stocks and commodities, with an emphasis on emerging markets and Japan rather than the US, EU, and UK. A transition from industrials/utilities to energy/tech sectors is evident, with Big Tech considered the most “crowded trade.”
6. Contrarian Trades: For a risk-on scenario, the top trade suggestion is “long REITs, short bonds,” anticipating the S&P 500 to reach around 4.8k. Conversely, for a risk-off scenario, the recommendation is “long utilities, short tech,” envisioning the S&P 500 falling to around 4.2k. The performance of REITs is seen as a significant indicator: a strong recovery could signal continued economic growth, while weakness might foreshadow a potential recession.