Here’s where the big fund managers are putting their money

With investors less pessimistic than they have been for some time, our City writer explains why the professionals are spending some of their cash and what they’re doing with it.

Professional investors have started the year in a less bearish mood after a survey found their allocation to cash dropped by the most since the summer of 2020.

The Bank of America fund manager survey for January also noted that optimism on the global economy is at a one-year high amid hopes that inflation has peaked and that the Federal Reserve funds rate should peak at around 5% in the second quarter.

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The report, whose coverage spans assets under management worth $772 billion (£624 billion), went on to reveal a collapse in allocation to US equities as a net 39% said they had an underweight position. That’s the most since October 2005.

This follows a rotation into emerging markets, where investors increased their overweight position to the highest since June 2021 at a net 26%. They were also their most bullish on the eurozone since last February after moving out of an underweight position.

Allocation to UK equities improved three percentage points to a net 15% underweight, representing the best level since August and in line with the long-term average.

Pessimism towards US equities comes as Wall Street braces for the current results season to show a decline in earnings of around 4%, the first time the S&P 500 index will have seen a year-over-year fall since the Covid-hit third quarter of 2020.

The figures posted so far have been mixed, with Goldman Sachs yesterday revealing a worse-than-expected 66% fall in profits as it counts the cost of a barren period for deal-making activity due to higher interest rates and recession uncertainty.

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However, this week’s global fund manager survey by Bank of America at least suggests that Wall Street’s worries on the economy have eased a little since the end of last year.

China’s reopening after a long period of Covid disruption and hopes for an end to the interest rates shock that dominated trading conditions in 2022 means a net 50% of professional  investors expect a weaker economy in the next 12 months.

That’s still very bearish, but represents the most optimistic reading in a year. Bank of America added that expectations of a recession had fallen to a net 68% of respondents, from a 77% peak in November.

This caused cash levels to fall from 5.9% in December to 5.3% this month, although the survey said this remains high compared with a 4.7% average since 1999.

The survey also found that investors now regard monetary policy as too “restrictive”, a message that they think it is time for central banks to stop their tightening.

However, persistent inflation pressures continue to be regarded as the leading “tail risk” at 34%, the seventh month in a row that this has been the leading response.