Bank Of America Asked 300 Fund Managers How They’re Feeling: It’s Depressing.

Bank Of America Asked 300 Fund Managers How They’re Feeling: It’s Depressing.
Russell Burns

10 months ago6 mins

  • The latest Bank of America Global Fund Manager survey found that investment managers are still worried about a prolonged run of stagflation – that is, low growth and high inflation.

  • They’re keeping their positioning relatively bearish – underweight stocks and overweight bonds – and on the stocks side, they’re leaning heavily toward defensive sectors, like healthcare, utilities, and consumer staples.

  • With all those worries out there, it seems like a good time to look east for investment ideas. China’s stronger growth and Japan’s new central bank governor could both make for exciting opportunities.

The latest Bank of America Global Fund Manager survey found that investment managers are still worried about a prolonged run of stagflation – that is, low growth and high inflation.

They’re keeping their positioning relatively bearish – underweight stocks and overweight bonds – and on the stocks side, they’re leaning heavily toward defensive sectors, like healthcare, utilities, and consumer staples.

With all those worries out there, it seems like a good time to look east for investment ideas. China’s stronger growth and Japan’s new central bank governor could both make for exciting opportunities.

Mentioned in story

If you’ve started worrying a bit more about the global economy, well, you’re not alone. Bank of America’s latest Global Fund Manager Survey found that the pros are jittery too. Here’s what 286 survey-takers (with their collective $728 billion under management) had to say about the stocks, sectors, regions, and other assets they’re leaning on now – and which ones they’re staying away from.

They’re feeling dreary about the economy.

Their growth expectations weren’t overly bright to begin with, but they’ve noticeably dimmed this month: on balance, 63% of respondents now expect a weaker economy in the next year, up from 50% in March (dark blue line). That’s the most pessimistic they’ve been this year. And as you can see from the chart, expectations for the S&P 500 (light blue line) tend to move with economic expectations, albeit with a lag.

Net percentage of fund managers who said they expect a stronger economy (dark blue) and stronger S&P 500 (light blue) this year, compared to last year. Source: Bank of America.
Net percentage of fund managers who said they expect a stronger economy (dark blue) and stronger S&P 500 (light blue) this year, compared to last year. Source: Bank of America.

These pro investors say they’re increasingly worried about an even longer period of stagflation: the combination of high inflation and low growth is generally not kind to portfolios. More than 80% of respondents have been expecting above-trend inflation and below-trend growth for 11 months now. Currently, 86% of them see stagflation lingering into the first half of 2024.

What’s the opportunity then?

With so many of the pros feeling awfully gloomy, adopting more defensive positioning in your own portfolio may be a sensible approach. You can get that with the iShares Global Healthcare ETF (ticker: IXJ; expense ratio: 0.4%): it invests in the world’s biggest healthcare stocks. Healthcare is one of the strongest-looking defensive sectors, with the long-term earnings growth outlook remaining robust for pharmaceutical and medical device companies.

They’re positioning like it’s 2008.

Fund managers are already positioned for a weak macroeconomic backdrop. Their weighting in stocks (relative to bonds) is at lows not seen since the 2008-09 global financial crisis.

Fund managers’ net percentage overweight positions in stocks, compared to bonds. Source: Bank of America.
Fund managers’ net percentage overweight positions in stocks, compared to bonds. Source: Bank of America.

Fears about a potential credit crunch have driven bond allocations up to a net 10% overweight in April, compared to just 1% the month before. That’s the biggest overweight allocation these managers have had since March 2009, at the height of the global financial crisis.

What’s interesting to me is that if fund managers have already moved to become underweight stocks, then most would have already sold stocks to do so. And potentially more than you think: cash levels are still higher than normal. Cash allocations have remained above the 5% tactical "buy" signal since November 2021.

Positioning is always important to monitor when investing. And it’s also important to monitor what’s called the pain trade – that is, the move in the market that causes fund managers and asset allocators to underperform – and right now, that looks to be a higher stock market.

What’s the opportunity here?

If you’re buying bonds now, you probably want to stick to investment grade credit, given all the uncertainties out there. The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD; 0.14%) is yielding 5.2% a year currently and could be worth considering. As long as we don’t see another giant surge in inflation, that looks like a reasonable return.

Having a cash position is a solid idea right now. It’s not just safe: it’ll also allow you to pounce on buying opportunities when they arise. To hold cash, you could consider Apple’s new savings account, available through its iPhone app. It’s offering an annual interest rate of more than 4%, which looks like a pretty attractive risk-free return. You could also consider investing in money market funds, which are especially popular right now because of their higher interest rates. In the UK, the Vanguard Sterling Short-Term Money Market Fund (VASSTAI; 0.12%) is currently indicating a 4.2% yield, and in the US, the Fidelity Government Market Fund (SPAXX; 0.42%) is yielding around 4.48%.

And they’re leaning heavily on defensive stocks.

When you consider how dreary their macroeconomic outlook has become, it’s little surprise that they’ve moved into defensive sectors – for example, utilities, consumer staples, and healthcare – and out of more cyclical sectors – for example, banks, consumer discretionary, energy, and materials. The biggest switch has been out of banks and materials and into healthcare and utilities. They’ve also noticed a huge push into Big Tech stocks since March’s bank sector turmoil and they’re describing that sector’s stocks as the most crowded – over-owned – trade.

The net percentage of respondents who said they were overweight on defensive stocks, compared to cyclical ones. Source: Bank of America.
The net percentage of respondents who said they were overweight on defensive stocks, compared to cyclical ones. Source: Bank of America.

Investor allocations to financial sector stocks dropped to the lowest since May 2020 and allocations to real estate-related stocks declined to a net 16% underweight, from 20% the month before. It’s the lowest allocation since October 2020. Commercial real estate is seen as the most likely source of the next credit crisis, since it’s more vulnerable to tighter bank lending.

What’s the opportunity here?

Crowded positioning comes with its own special risk: and it can end with sharp price moves if earnings disappoint. With the mega-cap tech companies now seen to be the most crowded long position in the market, even a slight disappointment this earnings season could mean a sharp slide in the stock price. So, with Big Tech, it makes sense to be wary right now.

They’re looking for stocks from distant shores.

These fund managers are staking their biggest overweight stock positions in emerging markets and in Europe, and are notably underweight in the US and UK.

Absolute net stock overweightings by region. Fund managers are overweight emerging market (EM) stocks and eurozone stocks, and are underweight stocks from the US, UK, and Japan. Source: Bank of America.
Absolute net stock overweightings by region. Fund managers are overweight emerging market (EM) stocks and eurozone stocks, and are underweight stocks from the US, UK, and Japan. Source: Bank of America.

And then there’s Japan. A majority of investors (56%) said they don’t expect a change to the yield curve control policy this week during the Bank of Japan’s meeting – the first under the new central bank chief. And that’s maybe not a big surprise in light of the recent banking turmoil, but a change to the policy that keeps the yield on the 10-year Japanese bond to within a narrow band around zero still seems likely to happen later this year.

After all, after years of battling deflation, Japan now has an inflation problem: its consumer price index showed inflation rising at a hotter-than-expected 3.1% in March, compared to the year before. That’s had a lot of eyes focused on Japan, including Warren Buffett’s. The “Oracle of Omaha” recently flew to Japan, sparking a ton of speculation that he could consider investing in Japanese banks, which would be well-positioned to benefit from an increase in interest rates there. What’s more, UBS Wealth said last week that it expects the Japanese yen to strengthen by 10% if the BoJ shifts its policy.

What’s the opportunity here?

Emerging markets, helped by China’s economic growth, are looking better. You could consider adding iShares MSCI China (MCHI; 0.58%) or iShares MSCI Emerging Markets (EEM; 0.69%) to your portfolio to gain exposure to that growth.

And with the new BoJ governor likely to revamp the country’s monetary policy this year, a move that would likely push Japanese banks and the yen higher, shares of Mitsubishi UFJ ADR (MUFG) could be a good investment.

Finimize

BECOME A SMARTER INVESTOR

All the daily investing news and insights you need in one subscription.

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

/3 Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.

Finimize
© Finimize Ltd. 2023. 10328011. 280 Bishopsgate, London, EC2M 4AG