Judging by the results of the latest Bank of America monthly survey, big global investors made the right choice in favouring bonds and equities last month.
The monthly survey showed that investors have reduced their cash holdings (down to a two-year low) to embrace the largest overweight position in bonds since 2009. This position has been vindicated, at least temporarily, by the significant drop in bond yields following the decline in the US October Consumer Price Index.
US bond yields briefly exceeded 5% for the crucial 10-year security in the middle of last month. After the CPI news on Tuesday, they fell to 4.50% early Thursday, Sydney time.
In another noteworthy shift, fund managers in the survey shifted their stance on equities to overweight for the first time since April 2022.
Respondents demonstrated a strong preference for pharmaceuticals, technology, and telecommunications stocks, while they were most underweight on utilities, materials, and discretionary stocks.
BofA's strategist, Michael Hartnett, pointed out that the "big change" wasn't in the macroeconomic outlook but in expectations that inflation and yields would decline in 2024, as indicated by recent US CPI and Wholesale Price Index data.
This month has witnessed a robust rally in global stocks and bonds after a three-month slump driven by concerns of rising and persistently high interest rates. The Federal Reserve's latest meeting somewhat alleviated these concerns, leading to an asset rally. The CPI reading further reinforced the belief that rates will remain stable, with the next potential move in 2024 being a downward one.
BofA's survey indicated that the conviction regarding peak Fed rates is now the strongest since the poll began asking investors about the timing of the end of the rate hiking cycle. Consequently, cautious investors have reduced cash levels to 4.7%, the lowest in two years.
"Investor playbook for 2024 is soft landing, lower rates," wrote Hartnett in commentary accompanying the survey. The survey also showed that investors increased their allocation to US and Japanese stocks while reducing exposure to euro area and UK equities. In fact, the relative overweight in US and Japan equities versus euro area and UK equities is the largest in 15 years, coinciding with the peak of the Global Financial Crisis.
The survey was conducted from the third to the ninth of this month and involved 225 participants with $553 billion in assets under management.
Additional findings include:
- Two out of three investors surveyed see a soft landing as their base case scenario for the global economy in 2024, which may explain the attractiveness of bonds and some US equities.
- The most crowded trades are long big tech, short China equities, and long T-bills.
- Investors view US/European Union commercial real estate as the most likely source for a credit event, while the Israel-Gaza conflict remains a continuing concern.
