By Vicki Schmelzer
— Record Underweight in Bonds On Rate Hike Jitters
NEW YORK (MaceNews) – World growth expectations fell more markedly in October, prompting formerly bullish global investors to retreat, according to the findings of BofA Global Research’s monthly fund manager survey, released Tuesday.
Growth expectations were weighed by fears of higher interest rates, as evidenced by the record underweight seen in bond holdings.
A net six percent of those polled this month looked for weaker world economic growth in the coming year, a sharp contrast to September when a net 13% of investors looked for stronger economic growth, and a far cry from the net 91% peak growth expectations seen in March and February, the survey said.
Bigger picture inflation concerns remained subdued and unchanged in October, with a net 1% of managers looking for lower global CPI in the coming 12 months. This compared to a net 4% looking for higher global CPI in August and a record net 93% looking for higher inflation, seen in April and March.
In October, a net 58% of those polled saw inflation as transitory, versus a net 38% saying that it is permanent. Last month, a net 69% saw inflation as transitory, with a net 28% stating that inflation would be permanent.
In terms of portfolio holdings, average cash balances rose to 4.7% this month, up from 4.3% in September and 4.2% in August, “driven by a massive drop-off in bond allocation,” BofA Global said.
Allocation to cash rose by 12 percentage points to a net 27% overweight in October, the highest since July 2020, the survey said.
Global investor allocation to commodities rose to a net 28% overweight this month, compared to a net 18% overweight in September and a net 17% overweight in August, and very close to the net 29% overweight seen in July, which was the highest reading ever, BofA Global said.
A net 50% of portfolio managers were overweight global equities in October, unchanged from September and down from a net 54% in August. These levels compare to the record highs near 70%, seen in 2011.
However, on the apparent stability of equity holdings, BofA Global noted that “the picture does get more nuanced when looking at hedge fund net equity exposure which has dropped drastically in October to 26% from 41% last month.”
This month, a net 80% of managers were underweight bonds, the largest underweight ever, the survey said. This compared to a net 69% underweight and a net 67% underweight seen in September and August respectively.
The reduction in bond allocation was driven by inflation concerns and expectations for higher yields, the survey said.
On Fed policy, the Federal Reserve is now widely expected to announce the tapering of its asset purchases in November. Global investors see the “most likely outcome” of the tapering to be “higher volatility,” a “stronger dollar” and “higher credit spreads.”
Looking ahead to next year, 44% of those polled in October looked for the Fed to raise rates one time in 2022, with 24% looking for two hikes and 24% expecting the central bank to keep policy steady. Three percent of managers looked for three rate hikes in 2022 and 1% saw scope for four rate hikes in 2022 (4% had no view).
Inflation and Fed policy were “tied for #1 driver of asset markets in 2022,” the survey said.
On regional equity asset allocation, global investors made only modest adjustments in their holdings, with Japanese markets seeing the greatest improvement.
Allocation to U.S. stocks rose to a net 16% overweight in October, versus a net 10% overweight in September and a net 11% overweight in August.
This month, a net 34% of managers were overweight eurozone stocks, compared to a net 38% overweight in September and a net 36% overweight in August.
Fund managers reduced global emerging market (GEM) stock holdings to a net 5% underweight in October, the largest underweight since September 2018. This compared to a net 2% underweight in September and a net 3% overweight in August. Current levels are well down from the record net 62% overweight seen in January.
Portfolio managers had a net 7% overweight to Japanese equity markets this month, compared to a net 1% underweight in September and a net 12% underweight in August.
UK equity allocations showed managers with a net 12% underweight in October, compared to a net 4% underweight in September and a net 2% underweight in August.
In October, the biggest “tail risks” feared by portfolio managers were: “Inflation” (48% of those polled), “China” (23%), “Asset bubbles” (9%), “Fed taper” (9%), “COVID-19 delta variant” (3%), “US fiscal policy” (3%).
In September, the biggest “tail risks” were: “Inflation” (24% of those polled), A “taper tantrum” (19%), “COVID-19 delta variant” (17%), “Asset bubbles” (15%), “China policy” (11%) and “Geopolitical risk” (9%).
In October, the “most crowded” trades deemed by managers were: “Long Tech Stocks” (35% of those polled), “Long ESG” (17%), “Short China and EM” (14%), “Long Bitcoin” (10%), “Long Oil” (10%), and “Short US Treasuries” (9%).
In September, the “most crowded” trades were: “Long Tech Stocks” (40% of those polled), “Long ESG” (22%), “Short China Stocks” (15%), “Long Bitcoin” (11%), “Long US Treasuries” (6%) and “Long Commodities” (3%).
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Contact this reporter: vicki@macenews.com
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