Investors are becoming more optimistic again – here’s what they are buying

Sentiment among professional investors is beginning to improve, as recession concerns fade and stock markets rally.  

Bank of America’s latest fund manager survey found that large investors were the least bearish since February 2022, and had moved their typical cash balance down to 4.8% from 5.3%, as they put more money to work in the market.  

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This meant that the signal from cash allocations no longer indicates a reason to buy shares. Bank of America's rule is that cash balances above 5% are a contrarian signal to invest, while cash balances below 4% trigger a “sell” signal.

This contrasts with July's survey, which showed that fund managers were still not convinced by the stock market rally.

Investors are buying into the rally in technology stocks, with long US tech the most overweight trade at the moment.  

The Nasdaq-100 index, a proxy for US tech shares, has risen 40% this year in dollar terms, partly due to hype around the potential of artificial intelligence (AI).  

The strength in technology stocks has lifted the S&P 500 index of America’s biggest companies, which has risen 17.5% this year.  

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Bank of America said: “August saw investors buying into tech, energy and banks, and selling out of industrials, discretionary and utilities. Investors are the most (net) overweight pharma, tech and staples, and the most (net) underweight utilities and discretionary.” 

One reason for the improved sentiment is that concerns over recessions are fading. Now, 42% of investors say that the global economy is unlikely to experience recession over the next 12 months, the most since June 2022. 

Increasingly, investors now expect no recession at all within the next 18 months, with 31% expecting no economic pullback, up from 19% in July and 14% in June. 

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This is because inflation is coming down, but economic growth and employment figures have remained strong, indicating that central banks may pull off a “soft landing” and not bring economies to a standstill due to the fight against inflation. 

Professional investors are bullish on bonds, with expectations for lower bond yields, a consequence of rising bond prices, hovering near 20-year highs. 

The survey found that the biggest risks to markets were: high inflation keeping central banks hawkish, geopolitics worsening, bank credit crunches and global recession, a systemic credit event, and an AI/tech bubble. 

Despite improving sentiment, UK shares have disappointed this year. The FTSE 100 and FTSE All-Share have both dropped 2%.