One day after Bank of America released its latest, and quite bearish Credit Investor Survey, on Tuesday the bank has published its latest, and far broader, Fund Managers Survey which polled a total of 225 panellists with $641bn AUM during the period of November 2-8. According to the survey administrator, BofA CIO Michael Hartnett, there were three key takeaways:
- Investors forecast the S&P500 to peak at 3056 (give or take) and are waiting for the 10-Year yield to reach 3.7% before rotating from stocks into bonds
- Cash levels fell in Nov… To BofA this suggests that positioning is not bearish enough for Big Low (which will likely take place in Q2 2019 at the earliest)
- Perhaps most notable is that the allocation to tech plunged to the lowest since Feb’09 even though investors still see “Long FANG-BAT” as the most crowded trade; Meanwhile, investors are long US$ & not yet long global recession
Some more detailed observations together with charts:
On when the market finally tops, investors think the S&P 500 will peak at 3056 (a weighted average of the responses) suggesting 12% upside from today’s level, even though – like the market – this level appears to be rolling over …
…but as BofA notes, 1 in 3 FMS investors (30%) now think US stocks have already peaked, double last month’s reading (16%). This likely also means that there are quite a few who see the S&P rising as high as 3500 or more.
Next, when looking at the big risk cited by credit investors, namely rising rates, Wall Street investors said they don’t expect a rotation from equities to bonds until 3.7% on the 10-year Treasury (also the averaged weighted response); This is about 20bp higher than the response back in April 18.
Contrary to reports of asset liquidations, survey respondents said that their cash level actually fell to 4.7% from 5.1% (just above the avg of the past 10 years of 4.5%) and hovering just above neutral even as investors reportedly stay bearish. To BofA this means that the Cash Rule has been in “buy” territory for the past nine months. As a reminder, the FMS Cash Rule works as follows: when average cash balance rises above 4.5%, a contrarian buy signal is generated for equities. When the cash balance falls below 3.5%, a contrarian sell signal is generated.
The survey also reveals an interesting split: on one hand, the percentage of FMS investors saying they are net overweight tech has fallen to just 18%, the lowest since Feb’09…
… even though for the 10th consecutive month, “Long FAANG+BAT” (Facebook, Amazon, Apple, Netflix, Google + Baidu, Alibaba, Tencent) remains the answer to what investors believe is the most crowded trade (the August reading was most crowded trade outright since Long USD Dec ’15).
One reason for the revulsion away from tech may be the following: When asked “What do you think will be the best performing asset class in 2019?” the most popular response by far is “non-US equities” (45%), followed by the S&P in distant second at 17%, and commodities third with 15% of respondents.
There was less certainty on the other side: when asked “What do you think will be the worst performing asset class in 2019?” 25% said Corporate bonds, followed immediately by Government bonds with 24%. The S&P was third with 18% of the answers.
In this vein, 61% of respondents expect high-quality to outperform low-quality (up from 59% last month) – a “deep late cycle” prediction, while 46% expect large cap stocks to outperform small cap stocks (up from net 42 last month, and a new 2-year high).
And in another confirmation of a late cycle market, the percentage saying value will outperform growth next 12 months jumped 19% MoM to 39%, the highest since Feb’17
In another surprising twist, even though investors have benefited greatly from corporate shareholder payout generosity, a net 33% of them also think corporate payout ratios are too high, a record high, reflecting concern about US corporate debt, which is also at a record high @46% of GDP.
Taking a step back and looking at the global economy, FMS macro expectations are bearish with 44% of survey respondents expecting global growth to decelerate in the next 12 months, the worst outlook on the global economy since Nov’08.
At the same time, 54% of FMS investors think Chinese growth will slowdown in 2019, the most bearish outlook since Sept’16.
And while they may be bearish, they are not too bearish, as just 1 in 11 (11%) of FMS investors expect a global economic recession in 2019.
One possible reason: too many still believe that inflation and not deflation remains the major concern for the economy: indeed, the consensus view among investors is for higher inflation; net 70% expect core CPI to rise over the next 12 months, but conviction has slipped since the recent peak of 82% in Apr ‘1.
A note for the contrarians: investors are concerned that US stocks, and global healthcare equities are most vulnerable to a deeper bear market; and last domino to drop in ’19 likely US dollar (most overvalued since 2006); trading bulls should play year-end rally via China plays (Eurozone, industrials, materials). That’s because in November, investors bought the Oct correction & increased exposure to US & EM stocks, REITs, and healthcare…but as noted above, the allocation to global tech sector collapsed to lowest level since Feb’09… and despite investors predicting that value will outperform, ominously there have been no signs of investor rotation from tech to “value”, i.e. banks, small cap, industrials, EAF.
In other words, investors continue to say one thing, and do the opposite.
Commenting on the latest survey, BofA’s Michael Hartnett said that “we remain bearish, as investor positioning does not yet signal ‘The Big Low’ in asset markets.”
via RSS https://ift.tt/2K28X8H Tyler Durden