Professional investors are shrugging off inflation concerns and piling into these sectors, while the UK is at its most popular in seven years.
Fears that a “taper tantrum” will shatter the current calm of stock markets have been played down after the majority of investors said inflationary pressures should be transitory.
The latest monthly fund manager survey by Bank of America (BoA) found investors still bullishly positioned for growth via long positions in commodities, cyclicals and financials.
They are hopeful that the first signal from the US Federal Reserve about scaling back of stimulus measures — most likely in September — will be a peaceful rather than turbulent affair.
This relaxed view on tapering has aided global stock markets in recent weeks, with the S&P 500 closing at a new record last night and London's FTSE 100 index also at a pandemic high.
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The performance has been in contrast to the volatility seen in March when fears over how global stimulus efforts will impact inflation drove US borrowing costs to 1.8%. Tech stocks were particularly impacted as their high valuations are built on future strong cash flows.
Benchmark US bond yields have since fallen back to 1.5%, even though recent figures showed US core inflation at a 30-year high of 3.8%. The response of policymakers on the US Federal Reserve has been that these pressures are transitory, a view backed by 72% of investors in the BoA survey of 224 fund managers with $667 billion in assets under management.
Even so, the taper tantrum of 2013 when stock markets went into panic mode after the Fed placed the brakes on quantitative easing is clearly still fresh in memories. It was identified in the survey as the leading tail risk for markets, alongside inflation.
As well as a “peaceful taper”, investors see the investment cycle transitioning from early to mid-cycle, with 68% not expecting recession until 2024 at the earliest.
The survey also found that the commodities sector, which has benefited from rising prices as the global economic recovery gathers pace, has now overtaken bitcoin as the most crowded trade. The cryptocurrency has fallen sharply in value since last month's survey, but 81% of investors still believe it is a bubble.
Positioning towards UK assets continued this month and is now at its highest level since March 2014. Brexit and the leaning of the FTSE 100 index towards banks and energy companies has held back the UK's appeal in recent years, but that's now changing as the economic recovery takes shape and investors position for higher interest rates.
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The survey identified banks as the number one overweight sector, while tech allocations also jumped at the expense of more defensive sectors, particularly utilities.
Asked what assets will be the best performing in the next four years, investors said they favoured value and tech stocks at 24% and 23% respectively.
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