Fund managers are underweight equities, most since May 2020, BofA survey shows; cash levels remain high

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Global fund managers are underweight equities, according to the Bank of America (BofA) monthly survey. Fund manager underweight positioning is the highest since May 2020 – a net underweight of 15% in June 2022, compared to a net overweight of 13% the previous month. Global equity markets have been nervous in recent months with multiple headwinds ahead, including rate hikes, inflation and supply chain bottlenecks. The fund manager’s survey showed cash levels fell to 5.6% from 6.1%, but still remain high. It is important to note that the BofA survey took place before the release of inflation figures last week.

So far this year, the Dow Jones is down 16% while India’s Nifty 50 has plunged more than 10%. BofA said U.S. equity markets have officially entered a bear market as June’s BofA Fund Manager Survey signals deeper investor distress. The survey added that Wall Street sentiment is dire.

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In terms of asset allocation, investors favor cash, healthcare, commodities and energy. On the other hand, these are short bonds, consumer discretionary, utilities and equities. On a monthly basis, the BofA survey showed that over the past 4 weeks, FMS investors have increased their allocation to bonds, Eurozone, emerging markets and technology. “…at the same time, rotation of defensive sectors such as commodities, healthcare and utilities, and shrinking cash.”

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Despite the reduced cash and increased bond allocation, fund managers are still the most bullish on cash and the most bearish on bonds. In terms of regions, survey participants highlighted that they were also bearish on stocks from Japan, the UK, EU, US and emerging markets. “67% of FMS investors believe oil will produce the best returns in 2022 (vs. 56%),” the survey adds.

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Weak growth optimism

Additionally, the BofA survey showed that global growth optimism has fallen to a new low. “The net percentage of FMS investors expecting a stronger economy fell to -73%, the lowest since 1994,” BofA said. They expect inflation to be elevated over the next 12 months, paving the way for stagflation. Fear of stagflation is at its highest since June 2008.

Along with weak growth optimism, fund managers also expect lower global earnings expectations. With this in mind, investors are encouraging companies to “play it safe”. “Investors want companies to strengthen their balance sheets (to 44% from 41%, the highest since Jan. 21) rather than increase capital spending or return cash to shareholders via buyouts,” they said.

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