–But Reluctant to Embrace Risk; US Election Top ‘Tail Risk’
By Vicki Schmelzer
NEW YORK (MaceNews) – Global investors remained bullish in January, but were reluctant to embrace risk given 2020 uncertainty, according to the findings of BofA.
Global Research’s monthly fund manager survey, released Tuesday.
For the first time, fund managers cited the November U.S. presidential
election as the top “tail” risk.
“Investors are bullish but not euphoric,” said Michael Hartnett, chief
investment strategist at BofA Global. “We stay irrationally bullish risk
assets until peak positioning and peak liquidity incite a spike in global
bond yields and ‘the big short’ opportunity.”
In January, a net 36% of investors polled looked for global growth to
improve in the next 12 months, versus a net 29% in December. This
compared to January 2019, when a net 60% of investors had a bearish
global growth outlook, the worst outlook for the world economy since
July 2008.
Average cash balances remained unchanged at 4.2% for the third
straight month, down from 5.0% in October. Cash levels currently are
at the lowest level since March 2013, the survey said.
Allocation to cash fell modestly, to a net 16% overweight, this month,
down from a net 18% overweight in December. This compared to a net
44% overweight in February 2019, which was the highest overweight
since January 2009.
Inflation expectations surged yet again in January, with a net 56% of
managers looking for global inflation to rise in the next 12 months. This
compared to a net 43% with that view in December and a net 31% with
that view in November.
This month, fund managers continued to be biased towards equities
over bonds
In January, a net 32% of managers were overweight global equities, a
17-month high and compared to a net 31% overweight in December
and a net 21% overweight in November.
As a point of comparison, in June 2019 a net 21% of fund managers
were underweight global equities, which was the lowest equity
allocation since March 2009, when the S&P 500 hit a low of 666.79 in
the wake of the financial crisis.
In January, a net 46% of portfolio managers were underweight bonds,
versus a net 48% underweight in December and a net 47% underweight
in November. The current bond allocation compared to a net 69% bond
underweight in February 2018, which was a record low.
Fund allocation to commodities showed managers with a net 10%
overweight this month, the highest since March 2012 and up from a net
6% overweight in December.
On regional equity asset allocation, global investors continued to move
monies out of the U.S. into other regions, especially emerging markets,
the survey said.
Allocation to U.S. stocks dropped to a net 4% overweight in January
from a net 8% overweight in December and a net 14% overweight in
November.
FMS investors predicted that the S&P 500, which closed at 3,329.62
Friday, will peak at 3,400, up from the 3,022 forecasted in December
2018 and “the highest since the question was first posed in June 2018,”
the survey said.
In January, a net 27% of fund managers were overweight eurozone
stocks, the highest since May 2018. This compared to a net 24%
overweight in December and a net 13% overweight in November.
Investors had a net 32% overweight to global emerging markets this
month, compared to a net 25% overweight in December and a net 17%
overweight in November. As a reminder, EM holdings peaked at a net
34% overweight in May and April 2019.
Emerging markets continued to be “the most preferred region among
FMS investors,” BoA Global said.
At the start of 2020, portfolio managers reduced their Japanese equity
holdings to a net 2% overweight, down from a net 6% overweight in
December, which was the highest overweight since February 2019.
UK equity allocations were steady in January, with a net 13% of those
polled underweight UK stocks, improved from a net 21% underweight
in November. The record UK underweight was the net 41%
underweight seen in March 2018.
“Note the average UK allocation from 1999-2016 was -10% vs. -28%
post-Brexit,” the survey noted adding that, “FMS investors have been
closing their structural UK underweight following the election of a
majority Conservative government.”
In January, the biggest “tail risks” feared by portfolio managers were:
“Outcome of 2020 US Presidential election” (29% of those polled),
“Trade War” (22%), “Bond bubble pops” (20%), and “Monetary policy
impotence” (14%)
Last month, the biggest concerns were: “Trade war” (33% of those
polled), “Outcome of 2020 election” (22%), “Bond bubble pops” (19%)
and “Monetary policy impotence” (12%).
In January, the deemed “most crowded” trades were: “Long U.S. tech
and growth stocks” (50% of those polled), “”Long IG corporate bonds”
(19%), “Short volatility” (14%), and “Long U.S. Treasuries” (11%).
The top “most crowded trades” in December were: “Long U.S. tech and
growth stocks” (34% of those polled), “Long U.S. Treasuries” (20%),
“Long IG corporate bonds” (20%), and “Short volatility” (19%).
An overall total of 249 panelists, with $739 billion in assets under
management, participated in the BofA Global Research fund manager
survey, taken January 9-16, 2020. “202 participants with $630bn AUM
responded to the Global FMS questions and 113 participants with
$260bn AUM responded to the Regional FMS questions.” BofA said.