Ahead of tomorrow’s rate cut from the US Federal Reserve, global investors are excited about the first reduction in four years.
The latest survey of global investors from the Bank of America shows a drop in cash holdings, a significant decrease in commodity interest, and generally more enthusiasm about the outlook.
It’s as though many investors are already spending the anticipated rate cut—expected to be 0.25%—before it is even delivered.
The growing enthusiasm highlighted in the survey might also help explain why more investors are calling for a 0.5% cut, despite the negative implications a large reduction would have regarding Fed concerns about the economy's health.
One ongoing theme from the survey is the persistent belief that the US economy is experiencing a ‘soft landing.’ However, the new forecasts and updated dot plot to be released tomorrow after the Fed meeting will provide more insight into whether the central bank believes this will be achieved.
The survey shows a slight dip in cash allocation from 4.3% to 4.2%, with BofA describing investors as "nervous bulls,” with risk tolerance falling to an 11-month low. The survey also highlights a marked shift in portfolios, including a noticeable rotation towards bond-sensitive sectors like utilities (understandable if rates are decreasing), which are at their highest overweight levels since 2008.
In contrast, allocations to cyclicals and commodities have plummeted to a seven-year low.
BofA reported that 6 out of 10 surveyed fund managers believe that current monetary policy is “too restrictive,” and as much as 90% expect a steeper yield curve.
Meanwhile, 79% forecast a soft landing for the global economy, although global growth expectations remain pessimistic, with 42% still predicting a weaker economy, though this is down from 47% in August.
The most crowded trade remains "long Magnificent 7," according to 46% of respondents, but interest in "shorting China stocks" and "long gold" is on the rise.
Despite concerns over China’s slowing growth, which has hit a three-year low in optimism, two-thirds of respondents believe a recession is unlikely.
The biggest risks identified by investors include a US recession, with 40% viewing it as the top concern, followed by inflation, which has risen to 18% as a significant threat, up from 12% in August.
