Fund managers turn bullish as ‘green shoots’ of inflation emerge

We explain why global investors are at their most bullish since February 2020 – prior to the Covid-19 sell-off. 

Global investors turned bullish in August but not “dangerously” so, while green shoots emerged in inflation assets, the latest Bank of America Merrill Lynch (BofAML) Global Fund Manager Survey reveals. 

The survey was the most bullish seen since February 2020, with cash levels coming down to 4.6%. Anything less than 4% puts investors in the “fear” camp, while cash above 5% shows they are in “greed” mode, BofAML says. 

Fund managers point out that we are no longer in a bear market rally, in fact, a net 46% say that we are in a bull market. As such, they are predicting growth from here – a net 79% of respondents are predicting higher growth, the highest level since 2009. A net 79% of investors are expecting to see a stronger economy, the highest since December 2009, and a net 57% are predicting higher global profits.

Fund managers are tipping a Covid-19 vaccine announcement by the first quarter of 2021, while they think the 10-year Treasury yield (currently 0.66%), will be 0.5% lower by the end of the year. 

Their recovery expectations also changed, with predictions of a V-shaped recovery low at 17%, while most expected to see a W-shaped (37%) or a U-shaped (31%) recovery. Only a “disorderly rise in rates” would be a catalyst for a sharp drop in credit and stocks, the survey suggests. 

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The inflation trade returns 

During August, investors rotated back to an inflation trade with European and emerging market stocks, as well as materials, banks, small caps and value stocks. This week, UK inflation, measured by the consumer price index (CPI), posted a surprise jump from 0.6% to 1% for July. A net 52% of investors surveyed said they are expecting to see higher global CPI over the next 12 months, a 15-percentage point increase from the previous survey. 

An equally weighted portfolio of stocks, bonds and gold was deemed the most overvalued it had been since 2008, while gold especially is seen as overvalued – from zero respondents last month saying gold was overvalued, to this month a net 31% saying it is, the highest level since 2011. Gold smashed previous records to climb above the $2,000 an ounce mark earlier this month as investors panicked about the impact of coronavirus on the global economy.

Rachel Winter, associate investment director at Killik & Co, commented:

“Although inflation is low at the moment, the gold price remains at an elevated level, which implies that some investors see a pick-up in inflation further down the tracks.”  

Crowded trades and top risks 

Exposure to small-cap and value stocks was low and US technology and gold were the most crowded trades. Contrarian trades include a risk-on vaccine trade and higher interest rates – this cyclical rotation would be best played by going long small-cap value and short technology, while a risk-off political volatility trade would be best expressed by shorting healthcare stocks, BofAML says. 

The top risks investors perceive are a second Covid wave, followed by a resurgence of the US/China trade war, and the outcome of the US election. 

Chief investment officers want company CEOs to act prudently in this environment, reducing debt and avoiding further capital expenditure. A net 57% of fund managers surveyed said they would want companies to use cash flow to improve their balance sheets, rather than returning cash to shareholders. 

Turning to ESG themes, managers expect climate change-focused investments to outperform over the next 12 months, significantly more than other themes. 

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