A month after getting all upbeat on equities – especially in the US and Europe – big global investors have retreated, cutting their holdings of equities to a yearly low and lifted their cash holdings as they hunker down and await the decisions this week from the US Federal Reserve, the European Central Bank, The Bank of Japan and the Bank of England.
According to the December monthly survey of big global fund managers from Bank of America (BofA) released Tuesday, the sharp switch to cash has triggered a ‘contrarian buying signal’ – ie investors should think about buying when conditions are not good – the old ’straw hats in winter’ idea.
The move to cash actually looks a prudent move given the emerging pressures from the central bank policy meetings, the resurgence of Covid – both delta and the new omicron variant – and the ending of year (month, quarter, half year as well) when performance and positions will have to be protected through to the start of a new year.
The Fed decision comes tomorrow morning and the Bank of England and ECB on Thursday night, Sydney time. The Bank of Japan is Friday. Only the Fed and perhaps the Bank of England are expected to announce policy changes with the UK central bank widely expected to lift interest rates.
The Fed is expected to accelerate its tapering of its huge bond buying activity and signal rate rises in 2022 instead of 2023 thanks to more persistent inflation.
Overlaying this has been the emergence and rapid spread of Covid omicron which is now battering developed economies like the UK and increasingly parts of Scandinavia with cases also spreading across the US (where Delta cases are again rising).
Given the way Wall Street and other markets have wobbled this week ahead of the Fed meeting and other issues, going back into equities now would be one of the actions furthest from fund managers’ minds.
So once these central bank decisions are out of the way, will fund managers take up the challenge of a ‘contrarian buying signal’ or wait to see what damage Covid omicron does. Certainly the International Energy Agency sees the new variant cutting global oil demand by 100,000 barrels a day between now and the end of 2022.
But in the context of the outlook for oil, that’s roughly neutral, although the IEA sees prices weakening from this year’s $US80 a barrel plus peak in October next year.
The December fund managers report from BofA revealed investor cash allocation to 5.1% of their holdings from 4.4% in November. The proportion of managers lifting cash holdings increased 14 percentage points from November to a net 36% overweight, the highest exposure since May 2020.
At the same time. big managers cut their equity positions to the lowest since October 2020, although investments in stocks remained above the historical average.
Hawkish central banks are seen as the biggest tail risk for the first time since May 2018, according to the December survey, followed by inflation and Covid-19’s resurgence.
The biggest policy risk is a too hasty tightening of monetary policy by a major central bank to try and bring inflation under control next year.
While fund managers shifted to more defensive assets in December, they’re are being more cautious, not panicking.
Global growth and profit optimism have improved, with investors forecasting that rate increases will hit inflation and not economic recovery, while the majority of survey participants see the current spike in prices as transitory.
In fact 55% of investors in the latest survey still see inflation as transitory, and only 6 out of 100 expect a recession in the next 12 months.
Given all the headlines about inflation – especially US inflation as we saw Tuesday with another spike in US producer prices to an annual rate of 9.6% from an annual 8.6% in October – the relatively accepting view of inflation by big investors is quite a surprise.
Despite the rush back to cash, in absolute positioning, investors are “very long” stocks, particularly those in the European Union and US (as they were in November), as well as healthcare, banks and tech, while shunning bonds, defensives and emerging-market stocks
Compared to November, allocation to US shares fell 11 percentage points to 18% overweight, while exposure to Eurozone equities dropped 2 percentage points to a net 31% overweight; allocation to British stocks rose 4 percentage points to an 11% underweight
Investors on average expect 2 Fed rate hikes in 2022, with 9 out of 10 saying the Fed will tighten policy by the first half of 2023, and the average expectation now for July 2022
It was also an interesting survey to see what big global managers see as the most crowded trading ideas – the usual suspects – long tech stocks (Apple?), long bitcoin (oops), long ESG Environment, Social and Governance), short US Treasuries (bonds), short China stocks, short Emerging markets forex such as the Turkish lira.
BofA’s survey took place December 3 to 9 and included 330 participants with $US968 billion in assets under management.
