Expectations of a soft landing and the end of the Fed’s rate hikes pushed up US equities. Flight from emerging markets as China’s growth expectations collapse.
Market sentiment is no longer bearish, but it’s still not strong, according to BofA’s September survey of global fund managers. Revised risk appetite supported the allocation to global equities, which was at a 17-month high. but The liquidity of portfolios increased slightly to 4.9% last month, indicating that investor sentiment is still not strong.
Supporting this rosier outlook is the expectation of a soft landing by the Federal Reserve (three out of four asset managers see this outcome as the most likely for the global economy) and the believe that the US central bank rate hike cycle is over. This is the opinion of 60% of those surveyed, compared to 9% in the July survey. For 74% of respondents, the first Fed rate cut is expected between April and December 2024 (38% see it in the second half of the year, 36% in the second quarter).
Contrary to these expectations of monetary policy relaxation, High inflation that will keep central banks in hawkish mode is considered the main risk in the current situation (40%).
Managers’ global growth expectations remain pessimistic, with 53% of respondents expecting the economy to weaken in the next 12 months (up from 45% in August). But the disconnect between economic growth expectations and the S&P 500 suggests that Equity optimism is driven by rate cut expectations.
Fly from emerging markets to American equities
The unprecedented increase in allocation to US equities is matched by a decline in emerging market equities. China’s declining growth expectations, to historic lows, are weighing on the developing sector. From 78% of respondents expecting a stronger economy in February 2023 to 0% in the current survey. This figure is lower than the September 2022 survey, before the post-Covid reopening.
Consistent with the skepticism about the Asian Dragon, only 12% of respondents expect a fiscal “bazooka.” Besides, Investors see China’s real estate sector as the first source of the next global credit event.
The most active operations in September were: long in major US technology companies (55%), short in Chinese equities (21%) and long in Japanese equities (8%). In addition, 77% of managers believe that high-quality returns are superior to quality returns (the highest number since October 2022).
In addition to US equities, the rotation of investors’ portfolios is in the direction of industrials, REITs and stocks. Emerging markets, telecoms, technology, fixed income and the UK were the asset classes with the biggest declines in exposure.
In absolute terms, portfolios were overweight health care, cash, consumer staples and technology in September. UK equities, utilities, real estate and eurozone equities are underweight.
