Big global investors are getting worried and defensive and the current June 30 reporting season with big profit rises, higher dividends and lots of capital management moves (such as buybacks) is not working its magic.
The growing number of Covid Delta cases is a concern, profit growth and profit margins are now seen cooling in coming months and there’s no longer as much confidence about the outlook for the global economy.
Monday’s global slide in markets supported the stance by big fund managers, with analysts blaming the continuing rise of Covid Delta infections – especially China where there are reports of growing disruptions to some of the country’s major ports and on the movement by road of goods within China.
China’s continuing crackdown on tech stocks is another concern that has emerged quickly in the past month (and helped drive down the country’s key market index, the CSI 300 by more than 8% in July).
Wall Street fell as did most European markets, but not London. Gold and oil slid as well.
According to the latest monthly survey conducted by Bank of America, global fund managers have increased their holdings in healthcare, insurance, utilities and cash, while cutting their exposure to materials, commodities, emerging markets and energy.
The survey found expectations the global economy will improve have fallen to a net 27%, which is the lowest since April 2020; in March 2021, 91% expected improvement.
Profit expectations also have fallen, with a net 41% expecting profits to improve, down from a peak of 89% in March, and down from 53% in July.
For the first time since July 2020, investors expect profit margins to decrease.
Cooling growth expectations are mainly due to COVID concerns, with 19% of investors citing the Delta variant as the biggest tail risk, closely behind inflation risks and worries about a taper tantrum.
The European edition of the monthly survey said that less than half of respondents in a monthly fund manager survey expect the European economy to further improve over the next twelve months, marking the lowest proportion since last June.
As a result, a net 23% of investors were overweight cash, the highest share in a year, BoFA said.
An overwhelming majority of investors expect only single-digit upside to equities as Europe’s economic outlook cool.
With inflation and taper tantrum risks topping investor concerns, rate-sensitive cyclical sectors like banks and insurance rank among the top three European sector overweights, Bank of America said, along with technology.
A net 36% of global investors said they were overweight European equities, down from 45% last month. About 2% of global investors were underweight UK equities, compared with slightly overweight in the previous three months.
And investors have awoken to the rising problems in China’s continuing crack down on companies such as internet, ride sharing, after hours schooling and computer chips.
The survey shows that from nothing a month ago. the big investors in the survey now see betting against China (shorting) as the third most crowded trade, and one of the five main risks to future market growth.
Tuesday saw China add to those concerns by moving to tighten control of its technology sector, publishing detailed rules aimed at tackling unfair competition and companies’ handling of critical data.
The latter point is why authorities cracked down on ride sharing giant, Didi.
Fund managers said “emerging market risk” is the biggest threat to financial stability in August, as a result of China’s regulatory crackdown.
Bank of America said it surveyed 257 panellists managing $US749 billion in assets in the survey conducted between August 6 and 12.
