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Fund Managers strike a more cautious tone in latest Bank of America survey

AInvestTuesday, Aug 13, 2024 11:51 am ET
2min read

The latest Bank of America Fund Manager Survey (FMS) reveals a growing sense of caution among investors, driven by recent market volatility and economic uncertainty. One of the key findings is a noticeable shift towards higher cash levels, with the average cash allocation rising to 4.1%, up from 4.3% in the previous month. This marks the second consecutive month of increased cash holdings, reflecting a more defensive stance among investors amid concerns over growth expectations and risk appetite.

A significant trend in the survey is the reduction in overweight positions in equities. Investors who are overweight stocks dropped sharply to 31% from 51%, indicating a pullback from riskier assets. This retreat is partly attributed to the recent volatility in the Japanese yen and a weaker-than-expected July jobs report, which have collectively dampened investor sentiment. Moreover, optimism about capital expenditures (CapEx) has fallen to a nine-month low, further highlighting the cautious outlook.

Investors are increasingly focused on the Federal Reserve's monetary policy, with 60% of respondents now believing that the Fed needs to implement four or more rate cuts over the next 12 months to support the economy. This is the highest level of anticipation for rate cuts seen in recent surveys and reflects growing concerns about the sustainability of current monetary policies. Additionally, 55% of respondents view current monetary policy as too restrictive, the highest level of concern since 2008.

The survey also shows a defensive rotation among investors, with money flowing into bonds, cash, and healthcare while moving out of stocks, particularly in Japan, Europe, and the tech sector. The overweight in bonds is now the largest in 2024, underscoring the shift towards safer assets. Despite the challenges, the "long Magnificent Seven" trade remains the most crowded for the 27th consecutive month, highlighting the persistent preference for major tech stocks, although conviction in large-cap growth stocks as leaders of a new bull market is starting to wane.

Expectations around a potential recession have risen sharply, with 39% of survey participants now anticipating a recession, up from 18% in the previous month. This increase in recession fears has overtaken geopolitical risks as the primary concern for the market, with high inflation falling to the third biggest worry. Interestingly, while the majority expect lower bond yields, there is also a contrarian view emerging, with some seeing opportunities in commodities versus stocks, and in non-U.S. equities versus U.S. equities.

Regionally, the U.S. continues to be the largest allocation for investors, but Japanese equities have seen the largest one-month drop in allocation since April 2016. This shift reflects the impact of the yen’s volatility and the broader uncertainty in the Japanese market. Conversely, there is a growing sentiment that large-cap value stocks may lead the next equity bull market, although confidence in this is still relatively low.

Finally, the survey highlights a growing desire among Chief Investment Officers (CIOs) for companies to return cash to shareholders through buybacks, dividends, or debt-financed mergers and acquisitions (M&A). This is the highest level of such sentiment since November 2013, indicating that investors may be looking for more immediate returns in a market environment that remains fraught with uncertainty. Overall, the survey underscores a shift towards caution, with investors positioning defensively as they navigate a complex and uncertain economic landscape.

Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.