Bullish fund managers boost equity exposure to 10-year high

Increasingly optimistic global investors are embracing risk by upping exposure to shares and commodities.

Super-bullish global investors are embracing risk and predicting a return to economic growth, the latest Bank of America Merrill Lynch Global Fund Manager Survey has revealed.

The February survey of 225 fund managers with a total of $645 billion in assets under management found that sentiment on global growth is at an all-time. More than a third of those surveyed said they think the global economy will experience a V-shaped recovery, versus 10% nine months ago.

A net 91% of investors say the global economy will be stronger in 2021, the best economic outlook the survey has ever recorded. “The only reason to be bearish is, there is no reason to be bearish,” says chief investment strategist Michael Hartnett.

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Cash positions drop

Cash levels are at an eight-year low of 3.8% on average, while exposure to equities and commodities is at the highest level since 2011 as a record number of investors embrace higher-than-normal risk. Only 13% of investors surveyed say the US stock market is in bubble territory, despite such a prolonged bull run.

Expectations for inflation and earnings per share growth are now close to record highs – 86% of investors are predicting higher inflation over the next 12 months, although this is lower than in January’s survey. For the first time since January 2020, investors want companies to increase capex more than they want them to improve their balance sheets, and the vast majority expect global profits to improve over the next 12 months.

Top risks and crowded trades

The top ‘tail risks’ on investors’ minds are the vaccine roll-out, which they think may not have a positive impact until July, another ‘taper tantrum’-style event in the bond market, higher-than-expected inflation, and a US stock-market bubble.

Crowded trades right now are long tech, long bitcoin, short the US dollar and long ESG (environmental, social, and governance), survey respondents say. Contrarian trades include energy and UK stocks, while consumer staples could be a “smart contrarian accumulator” in the first half of the year, the survey suggests.

Appetite for cyclical stocks and the UK grows

Investors are moving towards more cyclical investments, with high exposure to commodities, emerging markets, industrials and banks relative to the last decade. However, a market wobble in January caused investors to top up their positions in ‘safe’ growth stocks such as US technology and healthcare.

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Optimism on the UK market is finally rising, although it remains the number one underweight market, while emerging markets are slightly less popular than they were but remain the most preferred region. Just over half of fund managers say emerging markets will outperform this year, followed by oil, the S&P 500 and bitcoin.

Close to a record 31% of investors think small-cap stocks will outperform large caps over the next year. Meanwhile, a net 8% of respondents think gold is undervalued, the first time since last June.