Even as the 244 respondents to the latest BofA Fund Manager Survey (who manage $724BN in AUM) plowed into US equities, as their September allocation to US stocks rose again, up 2% to 21%, the highest since Jan ’15, making the US the most favored equity region globally for the second month running, amid bets the record divergence between the US and the rest of the world will continue for the indefinite future (or simply hoping upward momentum persists)…
… while allocations to EM equities dropped 9% to 10% underweight, the lowest since Mar’16 and a massive reversal from 43% overweight in Apr’18 when EM was the most favored region among FMS investors…
… they have also grown increasingly bearish on the outlook for the world economy, with 24% of investors surveyed expect global growth to slow in the next year, up from net 7% in August. This is the highest number of pessimists expecting a worse outlook on the global economy since December 2011.
How to reconcile these seemingly divergent series? According to BofA, as a result of tax cuts, fund managers now have the most favorable profit outlook on US corporate profits on record, offset by a tumbling outlook on EM profits.
In addition, when asked about their regional expectations for corporate profits, a net 69% of those surveyed found the US to be the most favorable region, a record 17-year high.
And with everyone rushing to the US, investors also cut their allocation to Eurozone equities by 6% to net 11% overweight, an 18-month low.
Yet despite trading on it, not even the survey respondents believe the decoupling between the US and ROW will last, with most, or 48%, expecting the US to catch down to the rest of the world and the current decoupling will end because US growth decelerates; 24% note they expect decoupling is likely to continue and 28% think growth in Asia and Europe will accelerate.
Elsewhere, for the eighth straight month “Long FAANG+BAT” (36%) remains the most crowded trade identified by investors followed by “Short EM equity” (16%) and “Long USD” (14%).
Meanwhile, a trade war remains the tail risk most commonly cited by respondents (43%) for the fourth straight month; the top three are rounded out by a China slowdown (18%) and quantitative tightening (15%). What is curious is the big drop in fears about trade war, just as Trump launched the $200BN “phase two).
Meanwhile, as gold continues to tumble, investors are increasingly warming to its value, if have yet to actually put their mouth where their survey is: the net percentage of survey participants saying gold is undervalued hits a record 17-year low of net 19%, down 8ppt from August.
Commenting ont he latest survey BofA chief investment strategist Michael Hartnett said that “Investors are holding on to more cash, telling us they are bearish growth and bullish US decoupling. Fund managers are signalling that they are starting to price in a hawkish Fed.”
He then summarizes the September survey as follows:
- Big 3 FMS takeaways: FMS investors are bearish growth (global optimism at 6-year low), bullish US decoupling (US equity long at 4-year high, US EPS outlook at 17-year high), and begin to price in a hawkish Fed (cash at 18-month high of 5.1%, gold valuation at 17-year low, IG bond weighting at 10-year low).
- Big 3 “tail risks”: trade war (receding), China slowdown (rising), Quantitative Tightening (rising).
- Big 3 “crowded trades”: long FAANG+BAT (receding), short EM (rising), long US$ (rising).
- Big 3 longs: US stocks, cash, growth (Chart 1).
- Big 3 shorts: Emerging Markets, UK, resources/commodities.
- Big 3 Sept’18 rotations: EM to Japan, banks to healthcare, materials to industrials.
- Big 3 contrarian FMS trades: our view remains cyclically defensive as Fed tightening in late-cycle; but Sept FMS inputs send BofAML Bull & Bear Indicator lower to 3.5 = 3-6 week risk asset pain trade up; most contrarian trade is long EM vs. short US; long materials vs. short healthcare also works if China stimulus becomes more visible in Q4.
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