Professional investor pessimism triggers ‘buy’ signal

Fund managers have been turning more bearish, increasing their cash stockpiles and becoming less optimistic about economic growth.

This is according to Bank of America’s (BofA) latest fund manager survey of professional investors, which found that cash levels jumped from 4.9% to 5.3% in a month.

However, the defensiveness of fund managers could be taken as a “buy” signal, it argues.

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Since 2011, a “buy” signal, triggered when cash levels go above 5%, would have seen S&P 500 returns of 2% in the two months after, 4% in the three months after, and 7% in the following six months.

Economic growth expectations remained pessimistic with 50% of investors expecting a weaker global economy over the next 12 months, compared with 53% in September.

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But a soft landing, where inflation is brought down without a recession, is still considered more likely than a hard landing.

Bank of America found that one out of four investors expect that there will be no recession in the next 18 months. That said, the share of investors expecting a recession in the first half of 2024 is rising, and now nearly half see the global economy falling into recession in that period, up from 36% in September.

The impact of higher interest rates is taking time to affect economies, but there are signs of weakness appearing.

Chris Iggo, chair of the AXA Investment Management Investment Institute, says that high interest rates work with a lag, but there could “suddenly” be some pain, which may lead to rates being cut in 2024 to revive the economy.

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He says that in the 2006-07 peak in interest rates, rates stayed there for a year, but the housing crisis did not happen immediately.

The most-crowded trades currently are buy Big Tech, Japanese equities and long-dated US government bonds, and sell short Chinese equities and the US dollar.

Investors seeking to be contrarian are short commodities, US tech and Japanese shares, while they are buying emerging market stocks, real estate investment companies and consumer staples, Bank of America found.