Fund managers bullish, but trimming tech stocks

Global fund manager sentiment is at its “most bullish” level since November 2021, the month before UK interest rates started rising from a historic low of 0.1% to stand at 5.25% today.

Bank of America’s monthly survey of professional investors, which is a closely watched indicator of investor behaviour and positioning, shows that fund managers have been in bullish mode amid greater optimism about global economic growth.

In addition, the pros have become increasingly confident that interest rate cuts will happen soon and that inflation is under control.  

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The latest survey for June, which polled 206 professional investors who are collectively responsible for $640 billion (£503 billion) of assets, found that investor optimism edged higher compared to a month ago due to rising expectations of interest rate cuts and lower inflation.

Bank of America’s sentiment indicator, which is based on investors’ cash levels, equity allocations and economic growth expectations, is currently at its highest level since November 2021.

The average cash allocation is in line with last month at 4%, its lowest level since June 2021.

The overweight position to equities is high versus history, at 39%, but declined by one percentage point versus a month ago.

On interest rates, more than eight in 10 pros (84%) expect the US Federal Reserve to cut interest rates at some point in 2024. On a 12-month view, only 8% believe interest rates will not be cut at all.   

While investors are bullish, it is interesting to see a slight shift away from technology stocks. The survey notes that the pros are 20% overweight the sector, but this is the lowest overweight position since October 2023. In February, the pros were 36% overweight tech stocks.

Trimming exposure to tech indicates that some investors are concerned about how global and US stock markets have become more concentrated, and therefore reliant, on the so-called Magnificent Seven continuing to deliver. The seven stocks have a weighting of nearly 30% in the S&P 500 index. 

Nvidia (NASDAQ:NVDA), which makes the computer chips (called GPUs) needed for artificial intelligence (AI) software, has been the star performer since the start of 2023, with its share price up over 800%. Yesterday, the firm became the world’s most valuable company, overtaking Microsoft (NASDAQ:MSFT).

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The Magnificent Seven, which includes Amazon.com (NASDAQ:AMZN), Apple Inc (NASDAQ:AAPL), Alphabet (NASDAQ:GOOGL), Facebook-owner Meta Platforms (NASDAQ:META) and Tesla (NASDAQ:TSLA), have been the most crowded trade for 15 consecutive months.  

Some fund managers, including Nick Clay, who oversees TM Redwheel Global Equity Income fund, think the tide will turn. In a recent On The Money podcast episode, Clay said the valuations for some big tech companies have become too elevated versus fundamentals, such as sales and profits. Nvidia is trading on a price-to-earnings (P/E) ratio of 77 times.

In the case of Nvidia, Clay pointed out that its valuation is the “most extreme”. He added: “At its valuation, the demands that have been put on Nvidia of what they have to deliver become so great that it becomes almost an impossible task for those companies to live up to those expectations.”

Clay also said: “It is probably quite true that Nvidia’s GPUs will still be the dominant GPU, but will they still be selling it at an 80% gross margin, which is what they are doing today?

“That is what the valuation is demanding that stays into perpetuity. And it demands that Nvidia’s GPUs are the only GPUs doing this. Well, the risk of that or the probability of that being the outcome is pretty low.”

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However, other fund managers who have owned some of the Magnificent Seven tech stocks for a number of years are continuing to run their winners. One fund manager in this camp is James Cook, manager of JPMorgan Global Growth & Income (LSE:JGGI) investment trust. He owns Nvidia, Microsoft, Amazon and Meta Platforms.

In a recent interview with interactive investor (links below), Cook explained why he remains bullish on the four stocks.

Cook made the point that as Nvidia has 90% market share, demand for its computer chips will outstrip supply for the foreseeable future.

Talking more broadly about the AI theme, Cook said: “I think you’re going to have those companies that can successfully monetise AI and those companies that will need to adopt AI just to remain competitive and to remain relevant.

“So, what we were trying to do is to find those companies that we believe can monetise AI, that will have stronger barriers to entry on the back of it.”

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The Bank of America survey also shows that the pros have been turning more positive on Europe, moving to a 30% overweight. This is a 12 percentage point increase over the past month.

Investors remain underweight the UK, but sentiment is slowly improving. The pros are 12% underweight UK shares versus 14% a month ago. Investors have been consistently underweight UK shares since July 2021.

Bonds are out of favour, with the pros moving to a 17% underweight position, which is the lowest weighting to the asset class since November 2022. Over the past month, bond allocation declined by 11 percentage points.

However, a potential positive development, the report notes, is that government bonds are expected to be one of the main beneficiaries of investors moving money out of money market funds. This type of fund will see its income decline when interest rates are cut, which could prompt some investors to move their money elsewhere.

In contrast, the latest statistics from the Investment Association (IA) show that fund investors have been turning to bond funds to take advantage of the higher yields on offer following interest rate rises.

Bond funds now yield between 5% to 7%, with those with higher yields generally taking on greater levels of risk. Bond funds are also yielding above inflation, which means investors are being paid to wait ahead of interest rate cuts.

While the jury is out on when rate cuts will commence, when they do happen, bond prices will rise, which is theoretically a big tailwind for bond funds.