Fund managers slow to cut equities despite being bearish on economy

A survey has found professional investors have concerns over the global economy but aren’t acting on them much so far.

Finding a fund manager with an optimistic view on the outlook for the global economy has become much harder, but that doesn't mean all is lost for stock markets.

The latest monthly fund manager survey by Bank of America shows investor allocation to equities dropped only slightly in the last month, despite the percentage expecting a stronger economy in the coming months falling from 75% in March to just 13% in September.

The best explanation offered by the US bank for this unusual disconnect is that a weaker macro-outlook will mean interest rates stay lower for longer.

This should help extend the TINA effect — There Is No Alternative — where shares remain attractive due to poor returns on cash and government bonds. A net 50% of respondents are long on stocks versus the 20-year average of 29%, while 69% are short on bonds.

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The vast majority of fund managers concede that the US Federal Reserve will begin its taper of economic support before the year is out, but the timing of the first rates rise is another matter.

With Covid-19 still a threat and China forecast to see slower growth over the second half of 2021, Wall Street now appears to be leaning towards a first US rates rise in early 2023 rather than the previous consensus view of December 2022.

The relaxed position of fund managers is highlighted by the fact that the share of investors taking out hedges to protect against a sharp fall in share prices over the coming three months has fallen to its lowest level since January 2018.

Few appear to be positioned for negative credit events, recession or stagflation, with inflation appearing to be less of a concern for the 232 participants in the Bank of America survey that covers more than $800 billion of assets under management.

Inflation is still viewed as the biggest tail risk, but overall the survey suggests that policymakers have been successful getting their message across about the pressures being transitory. Just over a quarter of respondents now see inflation as permanent.

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This is reflected in benchmark US bond yields of below 1.3% after recent figures showing US core inflation up 4% year-on-year offered signs of pricing pressures being near their peak.

Wall Street markets have been at record highs for much of 2021, but the increased economic uncertainty means S&P is on track for its first monthly fall since the start of the year. Allocation to US stocks dropped one percentage point to 10% overweight, with Japan a popular market after economic stimulus hopes were raised by the exit of prime minister Yoshihide Suga.

Allocation to Japanese shares surged 11 percentage points to a net 1% underweight in the month, whereas the UK dropped two percentage points to 4% underweight.