Investor optimism holds as demand for commodities returns

Sentiment among professional investors is no longer “extreme bearish”, as an improving economic outlook and rising stock markets lighten the mood on trading floors.

This is according to Bank of America’s latest survey of professional fund managers. By asking investors every month about their views on markets, it is able to track investment sentiment and give clues about where markets could be heading next.

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Over the first week of September, it found that cash levels were 4.9% on average, up from 4.8% in August.

This puts cash levels at the upper end of normal 4%-5% range, but well below max bear 6.3% level of October 2022. A lower cash position indicates more optimism that stock and bond markets will rise, while more cash indicates greater pessimism.

In September, investors moved out of emerging market equities and into US equities. The most-crowded trades were “long Big Tech”, short China equities and long Japanese equities.

In terms of equity sectors, investors were most bullish on healthcare, consumer staples and technology, and most bearish on UK equities, utilities and real estate.

Investors expect inflation to keep falling, with net 69% of investors expecting lower global price rises in the next 12 months.

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One sector regaining some favour is commodities. Allocation to commodities increased three percentage points from August to September, making investors net 2% overweight the sector.

Commodity allocation has now risen for two months in a row, after five straight months of decline. It is also the first time investors have been overweight commodities in four months.

For investors looking to be contrarian, Bank of America says that buying Chinese shares is an option, as well as high-yield bonds, real estate investment trusts (REITs), European shares and emerging market shares.

In August, we reported that professional investors were becoming more optimistic again, with the biggest talking point being a drop in cash allocations from 5.3% to 4.8% compared with July.