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One of the most anticipated reports in the market is the Bank of America (BofA) Fund Manager Survey. The latest report holds a few surprises. Despite concerns about recession, high inflation, and the market trading at record levels, fund managers are the most bullish they've been in two years, according to the survey.
While this positivity is notable, it comes after a significant market rally over the past three months, during which fund managers have deployed excess cash, reducing cash levels from 4.8 percent to 4.2 percent.
The main reason behind this bullish sentiment is diminishing concern about a recession. Nearly two-thirds of fund managers anticipate a 'soft landing,' with only one-tenth expecting a 'hard landing'.
The percentage of investors expecting a weaker economy in the next 12 months has decreased to a net 25 percent, down from January's 40 percent. This marks a substantial shift from the 79 percent level observed in July 2022.
There is almost near consensus regarding the outlook on interest rates, with around 85 percent of participants expecting the yield curve to steepen. However, when such widespread agreement occurs, market reactions often move in the opposite direction, and the movement can be swift.
Another area where fund managers agree is the Short China trade, which ranks as the second most crowded trade. Asset managers continue to highlight China's structural weaknesses.
As for sectors where fund managers are bullish, the answer is clear: Tech Fund managers are currently 36 percent overweight on the sector, the highest level since August 2020, with a significant portion of funds invested in the 'Magnificent 7' tech giants. Tech has been an overweight sector since July 2021, replacing healthcare.
Regarding potential challenges, global fund managers identify higher inflation as the biggest risk (27 percent), followed by geopolitics (24 percent), a systemic credit event (16 percent), and an economic hard landing (15 percent).
The most probable source of systemic risk is US commercial real estate, compared to US shadow banking previously.
The key insight for the market is that an increasing number of fund managers are becoming bullish and utilising their excess cash. This, in our view, signals a warning as most cautious investors have entered the market, leaving fewer participants to initiate new trades. It likely explains the sharp reactions to adverse news such as the unexpected CPI data that led to a decline in US markets.
To sum up, when greed increases in the market, it is time to stay fearful. And, if you are looking to identify when greed is making a top or fear a bottom, then consider what our Chart of the Day has to say.
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