Current sentiment on stocks and global growth among fund managers covered by Bank of America Corp for its October survey could be seen as very negative, at best.
That, somewhat perversely, could also be seen as a bullish factor as investors try not to throw in the towel and capitulate. And yet that could be what they need to do, if the BoA survey is any guide.
Quite a few analysts reckon the sentiment in the markets is now showing all the signs of full capitulation, which could open the way to an equities rally in 2023.
Global shares have had three or four big days in the past week but that was enough to get the desperates talking about equities taking a run – to where no one bothered to speculate with fears of a recession or sharp slowdown in 2023 still dominant.
The BoA survey showed cash levels rose again – to their highest in 21 years at 6.3%, which is still a long way from the 8% or so in the middle of the tech wreck in 2020.
There was a great deal of negativity about the value of the US dollar, shares, about the global economic outlook, about techs, but upbeat feelings about healthcare, energy and staples shares.
After the events of September 23 and the 45 billion pounds of unfunded tax cuts, UK markets and assets are being viewed very negatively, which is understandable.
In fact, the survey shows that global investors slashed their allocations to UK shares in the month after Liz Truss became prime minister.
Exposure to British stocks “collapsed,” with allocations dropping by nine percentage points compared with the previous month, according to BoA’s global fund manager survey in October.
A net 33% of investors are now underweight UK equities, the most in nearly two years.
But now that she has gone, will that change thinking? It will depend on who is the new leader but the mooted return of Boris Johnson will not see market attitudes change – only harden after his failure as leader.
The survey of 326 fund managers with $US971 billion under management was conducted from October 7 to 13 which meant it was in the middle of the problems generated by the UK financial strains especially and continuing concerns about the Fed’s rate rises, inflation in particular and 2023 growth.
The bank’s monthly global fund manager survey “screams macro capitulation, investor capitulation, start of policy capitulation,” Bank of America’s chief US strategist Michael Hartnett and his team of analysts commented about the survey results.
They expect stocks to bottom in the first half of 2023 after the Federal Reserve finally pivots away from raising interest rates.
“Market liquidity has deteriorated significantly,” the BoA strategists said, noting that investors have 6.3% of their portfolios in cash, the highest since April 2001, and that a net 49% of participants are underweight equities.
Nearly a record number of those surveyed said they expect a weaker economy in the next 12 months, while 79% forecast inflation will drop in the same period.
“While the stock market was immune to the bleak sentiment till last month, it has started to better reflect investors’ pessimism,” Hartnett wrote.
As the September earnings season gains traction, 83% of investors expect global profits to worsen over the next 12 months.
A net 91% said global corporate profits are unlikely to rise 10% or more in the next year — the most since the global financial crisis and a sign that suggests further downside to S&P 500 earnings estimates, according to the strategists.
Other survey highlights included:
- In absolute terms, investors are most bullish on cash, health care, energy and staples, and most bearish on equities, UK and Eurozone stocks, as well as bonds
- The most crowded trades are long US dollar, short Europe equities, long ESG assets, long oil, short emerging markets/China debt and equities as well as short UK debt and equity
- A record high share of 68% see the greenback as overvalued
Investors see European sovereign-debt markets as the most likely source for a systemic credit event (which is due to the UK problems and the European energy crisis and blow out in debt. The change in government in Italy is another negative).
And lower interest rates? Well 28% of participants see the chance for lower short-term rates within that timeframe.
But being so far underweight equities and with a handy dollop of cash available makes the chances of a rally breaking out in the middle of doom and gloom a solid chance of happening.
Remember how equities bounced in late March, 2020 after the pandemic driven sell-off and continued rising through all the doom and gloom of that year?
Yes, it was helped by ultra-low rates and a lot of cash, so the absence of those benefits this time around will probably see any rally slower and lower, if it happens.
