Investors pile into most crowded trade of all time

A fresh bubble in tech is now the number two tail risk cited by fund managers, second only to a second wave of Covid-19 infections.

Professional investors are rotating their positioning after an “epic rally” from March’s stock market lows, according to September’s Global Fund Manager Survey from Bank of America Merrill Lynch, with one trade proving especially popular.

The most contrarian trades investors are making right now are the beleaguered UK, energy and banks, while US technology and healthcare are the most popular long positions. In fact, long US tech is “the most crowded trade of all time”, the survey found.

A fresh bubble in tech is now the number two tail risk cited by fund managers, second only to a second wave of Covid-19 infections. The third most feared risk is the upcoming US election.

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Managers prepare for a small-cap revival

Managers are rotating their positioning to more cyclical areas (except the shunned energy and bank stocks), with allocations to small-cap and value stocks the highest since January 2018. In September, a net 14% of professional investors said they think large caps will outperform small caps, the lowest outlook on large-cap stocks since July 2018. 

At a regional level, US stocks are much favoured compared to Europe, the UK and emerging markets. 

New bull market has begun

More than half (58%) of investors say a new bull market has begun, compared to 25% in May, and the majority are predicting global growth will rise in the next 12 months. For the first time since February, more investors say we are in an early-cycle phase rather than a recession.

A net 18% of fund managers are overweight equities, but this makes them “far from dangerously bullish”, BofAML analysts say.

Cash levels ticked up slightly to 4.8% as fund managers kept their powder dry for buying opportunities, but at this level they are still below the ‘fear’ threshold of 5%, and far short of the ‘greed’ threshold of 4%.

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Covid-19 vaccine to lift bond yields

Investors are predicting a vaccine for Covid-19 will be available in the first quarter of next year, and this will be the most likely trigger for higher bond yields, the survey said. Around 41% of fund managers surveyed said a vaccine was more necessary for higher interest rates than inflation, and 37% think a credible vaccine will be announced by 30 January 2021.

Bank of America Merrill Lynch surveyed 224 panellists with $646 billion in assets under management for September’s report.