Investors buy shares as interest rate cuts loom
Sentiment is improving as a ‘soft landing’ becomes more and more likely, writes Sam Benstead.
20th December 2023 11:57
by Sam Benstead from interactive investor
The continued drop in inflation and relatively healthy global economy is encouraging professional investors to buy shares, as expectations for a “soft landing” improves sentiment.
A soft landing refers to central banks bringing down inflation through interest rate rises without triggering a recession. On the other hand, a “hard landing” would describe a successful battle against inflation, but a negative outlook for economic growth.
Bank of America’s latest fund manager survey of professional investors found that investors were the most upbeat since January 2022, and had cut cash from 4.7% to 4.5%, the lowest level since April 2021.
Its “cash rule” triggers a “sell” signal for equities when cash is 4% or lower, or a “buy” signal when cash balance is 5% or higher.
The closely watched survey, which compiles the views of investors with a total of $690 million (£540 million) between them, showed that nine in 10 thought US interest rate hikes had ended.
Two-thirds of respondents said they expected a “soft landing” for the global economy in the next 12 months. Expectations for a “hard landing” were at 23%, and one-third said they expect no recession at all in the next 12 months, while 32% expect the US to fall into recession in quarter two of 2024.
Stock and bonds markets are looking ahead to rate cuts next year, with the yield on the 10-year US government bond dropping from 4.5% to 3.9% over the past month, and the S&P 500 index rising 4.5% over the same period.
Bonds and technology shares are seen as the biggest winners from interest rate cuts at the start of 2024, according to the Bank of America survey.
The most-crowded trade is “long” the Magnificent Seven, which refers to a basket of America’s leading technology shares, including Apple Inc (NASDAQ:AAPL) and Microsoft Corp (NASDAQ:MSFT).
This group of companies has helped power the S&P 500 to a 25% gain so far this year, catching out many investors who were worried about lower profits and recessions during 2023.
Tech shares performed very well this year due to developments in artificial intelligence (AI). Kick-started by OpenAI’s launch of ChatGPT just over a year ago, which uses “generative AI” to answer questions, help with computer programming, and even solve maths problems, investors became very excited about companies building AI software, such as Meta and Microsoft.
AI also demands lots of computer-processing power, so computer-chip companies, such as Nvidia and Advanced Micro Devices, have also risen in value this year.
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