While fund managers expect markets to continue climbing, they were less bullish in February than they were in January, according to the Bank of America Merrill Lynch, prompting the bank to describe positioning as “irrationally bullish”.
The closely watched BofA ML Global Fund Manager Survey – which polled 221 panellists with $676bn in assets under management between 6-13 February – found that sentiment had weakened somewhat month-on-month.
Despite a more weakened growth outlook, however, asset allocators continue to increase allocations to growth assets and anticipate further upside to markets and the global economy.
The BofA Bull & Bear Indicator – one of the bank’s key market indicators – remains in neutral territory at 6.5, below the 8.0 level at which risk assets should be sold but also well above the 2.0 level at which they should be bought.
In addition, cash levels fell to 4 per cent from 4.2 per cent, the lowest balance since March 2013, while equity allocations hit a 20-month high to reach a net 33 per cent overweight.
As such, chief investment strategist Michael Hartnett said the positioning remains “irrationally bullish” for the time being.
Global growth expectations have now fallen by 18 percentage points, with just a net 18 per cent of respondents expecting the global economy to grow in the coming 12 months. Nevertheless, this is still above the lows reported during 2019.
Having dropped off the top of the list in January, trade war was no longer considered a top tail risk for investors this month.
It has instead been replaced by the US presidential elections, the potential bursting of the bond bubble and coronavirus COVID-19.
Indeed, concerns around COVID-19 – and its impact on Chinese growth – led to the first cut in global growth, global profits and global inflation expectations since October, at the height of trade war fears.
Source: BofA ML Global Fund Manager Survey
Just 15 per cent of respondents now expect global corporate profits to improve in the next 12 months, down 12 percentage points from the prior month.
Elsewhere, the survey revealed expectations of higher consumer prices index inflation in the coming 12 months were down by 17 percentage points, while allocators also cut their long-term rate expectations.
This showed, Hartnett said, that investors have ‘fully capitulated’ into deflation theme – a combination of “tepid” macroeconomic conditions, COVID-19 and an “oil plunge offset by ‘QE forever’ consensus”.
This was seen by the popularity of “deflation assets” this month – such as US and emerging market equities and technology stocks – and out of inflationary assets – including banks and energy names and value stocks.
A net 6 per cent investors now expect growth to outperform value over the coming year, which has benefited the growthier ‘deflation assets’.
Allocations to US equities jumped by 16 percentage points to a 19 per cent net overweight – the highest such position since September 2018 – with investors expecting further upside for the US blue-chip S&P 500 index.
Emerging markets equities remained the most favoured region as allocations moved up 3 percentage points to a net 36 percent overweight and the highest position since March 2019.
Technology allocations rose by 9 percentage points, month-on-month, to a 40 per cent overweight and the highest level since October 2016.
Despite generally bullish sentiment, not all parts of the equity market were in favour with respondents.
Allocations to eurozone equities were down by 8 percentage points in February, but still represented a net 19 per cent overweight position in asset allocators’ portfolios. Similarly, asset allocators’ holdings in Japanese equities fell 4 percentage points to a 2 per cent underweight.
Source: BofA ML Global Fund Manager Survey
Positioning in UK equities was down slightly to 14 per cent underweight among respondents and remains the most unpopular region with investors.
On a sector level, allocations to banks dropped 8 percentage points to a net 1 per cent underweight, while allocations to industrials, materials and energy were all down this month.