Record boom in stock market optimism

As fund managers buy more equities, find out their contrarian trades and expectations for 2020.

“The Bulls are Alive” was the verdict of a respected fund manager survey today as 2020 stock market optimism continues to build on hopes of a further global growth spurt.

The December research by Bank of America Merrill Lynch found that fund manager allocations to global equities jumped 10 percentage points to a net balance of 31% — the highest level in a year — as the amount held in cash dipped to the lowest level since March 2013.

This is based on a significant jump in optimism around the global economy, with the improvement in the past two months the biggest on record. Recession concerns have plummeted to the point that 68% of investors say such an event is unlikely in 2020.

The optimism comes with Wall Street markets already trading at a record high, while the FTSE 100 index is also less than 400 points off the all-time high seen in 2018.

Among European fund managers, equities allocation is strongest in emerging markets and the eurozone, with an underweight stance on the UK. This, however, is the best performance for the UK since the EU referendum and comes amid signs that sterling is the most likely currency to appreciate next year.

BoAML said the UK represented a potential contrarian play, particularly as a net 11% of global investors are currently overweight on the eurozone with a balance of 9% underweight on the UK.

Other contrarian trades for the start of 2020 in the report include commodities stocks, with the sector set to be one of the biggest beneficiaries of a US-China trade war truce.

The European report finds that fund managers are favouring quality-biased sectors such as financial services, technology and healthcare, reflecting a continued lower inflation backdrop.

Overall, the European report concludes:

“We believe EU stocks offer further upside and extremes remain unexploited.”

The global fund manager survey was conducted between December 6 and 12 and involved 247 panellists with US$745 billion of assets under management.

One-fifth of respondents said the global economy would experience above-trend growth and below-trend inflation, a seven-month high.

Global corporate profit expectations surged 23 percentage points from November, with a net 14% of investors saying they expect profits to deteriorate over the next 12 months.

When asked what they would most like to see companies do with cash flow, 46% of those surveyed said increase capital spending, versus 36% wanting corporates to improve their balance sheets and just 15% saying they want corporates to return cash to shareholders.

Respondents identified an “unexpected outcome” to November's US presidential election as the biggest 2020 risk, with the positive impact of a trade war resolution for capital expenditure seen as the biggest upside scenario.