Interactive Investor

The pros are fleeing to cash and buying commodities as markets plunge

17th March 2022 08:48

Sam Benstead from interactive investor

Cash positions among professional investors have hit the highest level since the peak of the Covid-19 stock market crisis in April 2020.

Sentiment among fund managers is extremely bearish due to fears about global economic growth and inflation.

Bank of America’s March fund manager survey of professional investors revealed that cash positions had surged to 5.9%, the highest level since the peak of the Covid-19 stock market crisis in April 2020.

This is because global economic growth expectations are at their lowest level since the 2008 financial crisis and most (51%) now think inflation is permanent rather than transitory.

Stagflation – a period of low growth and high inflation which will squeeze household incomes and hurt the stock market – is now more likely, according to investors.

Stock markets have tumbled this year. The FTSE 100 has dropped a modest 3%, but the S&P 500 index of America’s largest companies is down 11%. Global shares are off around 6.5%.

Aside from moving to cash, professional investors are buying commodities. The allocation to natural resources, such as oil, copper and gold, as well as the mining firms that extract them, is now at a record high.

Natural resources stocks are a way of profiting from inflation because as commodity prices rise, mining and oil stocks make more money.

Commodities are spiking in value at the moment as Russia, and its vast reserve of oil, gas and grains are shut off from the global economy due to its invasion of Ukraine.

Consequently, around half of respondents think oil will produce the best returns in 2022.

So far this year, oil has risen from $70 a barrel to $100, sending shares in Shell (LSE:SHEL) and BP (LSE:BP.) higher. Mining funds have also been star performers, with BlackRock World Mining Trust (LSE:BRWM) rising 24% year-to-date.

Bank of America’s “Bull & Bear Indicator”, a measure of how optimistic or fearful investors are, is 2.8 out of 10. Two is considered extremely bearish and a “buy” signal.

It said: “This is ‘bearish’ but not yet ‘extremely bearish’. The recent disconnect between global growth and equity allocation is now being corrected, with a significant decline in equity allocation this month.

“That said, investors remain overweight stocks, not underweight. Valuations are not yet at ‘recessionary’ close-your-eyes-and-buy levels.”

Investors thought geopolitical risk was the greatest risk to financial market stability, followed by central bank policy risk.

Allocation to UK equities decreased from February to March, with investors now their most underweight since November 2021.

The survey polled investors with a total of $960 billion between them.

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