Fund managers are spooked, but investor sentiment may get worse before it gets better, according to Bank of America’s (BofA) latest fund manager survey.
Sentiment is clearly poor. The percentage of investors expecting a bear market has doubled from 30 to 60 per cent. Cash holdings have spiked to recessionary levels. Hedge funds’ equity exposure is at its lowest level since April 2020. And global profit expectations have plummeted and are at levels seen in other times of marked financial stress.
Sentiment is especially black towards Europe, where cash allocations have soared to their highest level in 20 years. The percentage of managers expecting the European economy to weaken over the coming year is at its highest level since 2011, following the biggest monthly swing in growth expectations since BofA's records began in 1994.
This might sound like good news for contrarians who like to heed Warren Buffett’s mantra about being greedy when others are fearful. Indeed, the current high cash levels are associated with above-average one, three and six-month returns, says BofA.
The problem is that while cash, growth and profit expectations are recessionary, equity allocations are not at recessionary “close your eyes and buy” levels. Global equity allocations have dropped to their lowest level since May 2020 but investors remain overweight stocks, with current allocations hovering around their long-term average.
As a result, BofA’s Bull and Bear Indicator has only fallen slightly to 2.8, still above the 2.0 reading that triggers a contrarian buy signal. Investors are bearish but not “extreme bearish”, with BofA waiting for “full capitulation”.
