The latest survey of fund managers prepared by Bank of America confirms the continuation of the trend seen in August. The optimism of managers with cyclical assets and sectors continues to increase and on this occasion, with a stronger focus on the US stock market.
This is, in fact, the month in which the money of those surveyed left the emerging stock markets the fastest, while at the same time they entered the US stock market with strength. All this, encouraged by low expectations of a global recession, and seeks to benefit from the stock market rally that can be generated by the interest rate cut expected in the United States next year.
Investment flows from emerging markets are framed in a context of poor prospects for China. The managers surveyed made it clear: none of the 222 (they manage 616 billion dollars) who participated in the survey between September 1 and 7, believe that the Chinese economy will grow at a faster rate than the current one. within 12 months.
They ruled out a severe recession…
In recent months, the big question for investors is to evaluate the damage that the increase in interest rates of major central banks will create in the economy and the markets. The stimuli injected during the Covid-19 crisis led to inflation, and the antidote, rate hikes, threatened to destroy the economy.
Despite everything, managers expect for many months that the global recession will be mild, and that if it happens, an opinion repeated in the September survey: only 21% of those surveyed believe that there will be one serious recession, while 74% think it will be mild, or that it will not happen.
That there is no recession does not mean that the economy is not in the process of slowing down, something that is clear among those surveyed, although pessimism for economic growth in the next 12 months is far from stable. on like last summer. Levels not seen since the survey began in 1994.
…But there is a rate drop
With the US stock market currently trading at high multiples (the earnings multiplier with next year’s guidance is about 20 times now for the S&P 500), and even if a recession appears to be off the table, optimism to the managers of the American stock market can be surprising. What will investors see that will lead them to flock to Wall Street with such conviction in August? The US Federal Reserve’s monetary policy shift is one of the keys justifying this.
60% of respondents believe that the Fed interest rate has already increased
For the first time in this cycle, most managers surveyed (60%) think that the Fed has completed the process of raising interest rates that began a year ago. In August only 47% believed it, and in July only 9% of it. And that’s not all: even if the economy shows signs of stability, investors are clear that the start of rate cuts is imminent. 46% of respondents believe that it will begin in the first half of 2024, while 38% believe that it will begin in the second half of the year.
That the rate cut will be delayed due to high inflation is the main danger that managers see at this time, and this is shown by 40% of those surveyed on this occasion. Second, until now, the possibility of worsening geopolitics remains, with 14% of responses, while third, the possibility of a systemic credit event is highlighted as the biggest market risk.
This is where China has a fundamental, and worrying, role for those surveyed: the crisis in the real estate sector in the Asian country is again the main risk event that could cause it, according to those surveyed, surpassing real estate sector in Europe and America. this month.
Favorite sectors
Although the position of managers continues in defensive sectors, such as health, first, and second liquidity, the September rotation has become the most cyclical part of the stock market. US equities get the most weight in portfolios, followed by the industrial sector.
In contrast, exits occurred in emerging markets, in the telecommunications and technology sectors. Of course, compared to the historical positioning, fixed income continues to be the favorite asset at the moment, ahead of others.
Inflation is the antidote to debt
The debt of governments and companies has increased significantly, especially in the last three years, since the arrival of Covid. To solve this situation, the managers believe that inflation, that silent tax, is the great ally of the most indebted.
This is the first time Bank of America has included this question in its survey, and 30% of the managers surveyed believe that this is the ‘method’ used by the G7 countries to reduce their debt. Second, with 23% of the responses, the possibility of new tax increases is seen, while 14%, in third place, believe that they will decrease due to greater economic growth.
Cutting public spending appears in fourth place, with 13% of responses, followed by control of the interest curve, the most likely option for 8% of survey participants. 5% of those surveyed believe that an alternative other than the former will be used.
