Fund managers still not convinced by stock market rally

Big Tech is the most-crowded trade, but investors are still underweight equities, writes Sam Benstead. 

Sentiment among professional investors is still bearish, with “fear” still a bigger factor in decision-making than “greed”.

This is according to Bank of America’s latest fund manager survey, carried out among investors in July with a total of $650 billion (£500 billion) in assets under management.

It found that 60% of investors expect weaker global growth, leading to a large underweight in commodities.

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It also found that cash balances increased from 5.1% to 5.3% compared with June, indicating that they expect markets to fall and are ready to deploy cash reserves when asset prices are cheaper.  

This bearish reading from Bank of America comes as stock markets rally this year. The MSCI World Index, in sterling terms, has risen about 7.5%, while UK indices are flat, excluding the effect of dividends. American shares have led the world, with the S&P 500 up 9% in sterling terms and 19% in dollar terms.

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The bank found that investors were still underweight global shares compared with normal levels, but allocations were increasing as investors begin to believe that rising interest rates will not plunge economies into recessions. The most-crowded trade among professional investors is buying large American technology stocks, such as Microsoft, Apple and Alphabet (Google’s owner).

Including Tesla, Nvidia, Amazon and Meta (Facebook), these “magnificent seven”, as some commentators are calling them, accounted for 73% of the S&P 500’s gains in the first half of 2023.

Bank of America’s analysts expects the stock market rally to broaden in the second half of the year, but says that “mega-cap tech companies that are market share leaders should be considered core holdings”.

Other crowded trades include Japanese shares and long-dated US government bonds, as well as shorting Chinese shares and US banks.

Bank of America says that contrarians should go long commodities, banks, and REITs, while shorting tech, industrials and Japan.