In 2024, the market hasn't opened as enthusiastically as it finished 2023. Initially bullish and eager for the Federal Reserve's pivot towards potential interest rate cuts, the outlook has since become more restrained due to mixed data and pushback from Fed members.
Despite the caution, optimism about lower interest rates is at its highest in 23 years, according to a Bank of America survey. Surprisingly, cash holdings have risen to 4.8% from 4.5%, suggesting that many fund managers are still keeping an eye out for potential storms on the horizon.
The survey reveals that investors are notably bullish on rate cuts, with crowded trades favoring "long Magnificent Seven" stocks on Wall Street and "long-duration tech."
While the belief in falling rates persists, fund managers are taking precautions. The Bank of America global investment manager survey for January shows that many top investment funds have started buying assets like commodities, cash, and real estate as stores of value to protect against anticipated drops in bond yields.
The survey also indicates that fund managers are reducing their positions in bonds, banks, and insurance companies, anticipating sharp drops in bond yields due to Federal Reserve interest rate cuts.
A record 91% of fund managers surveyed expect short-term interest rates to drop over the next 12 months, marking the highest levels of bullish sentiment since 2001 when BofA's surveys began.
These funds are now diverting their investments into assets expected to benefit from lower interest rates, including commodities and real estate. The survey reveals that real estate investments have reached 12-month highs.
In addition, investments in cash and commodities are surging as funds seek to capitalize on expected value upticks.
Looking ahead, most funds (52%) believe that the Federal Reserve will have the greatest impact on equity prices in 2024. Furthermore, 68% expect the Fed to be the most significant driver of bond yields worldwide in the coming year.
Fund managers predict that technology and biotech companies will be the main beneficiaries of falling interest rates, as cheap access to capital is likely to boost innovation-driven growth companies that invest heavily in R&D and AI.
As of January 2024, healthcare and tech sectors rank first and second among the industries in which investment funds are most heavily invested, while UK equities are underweighted.
In contrast, investment funds remain overweight in bonds and the US economy compared to the past 20 years.
While global growth concerns have lessened since February, there are now worries about China's growth weakening for the first time since May 2022.
Key contrarian trades include long positions in China, Europe, banks, energy, and low-quality stocks, viewed as catch-up plays with room for positive growth.
