- Some of the biggest investors in the world have cut their equity allocations on increased concern that tighter central bank monetary policy and higher interest rates will affect company valuations at a time when economic growth appears to be slowing.
- Against the gloomy macroeconomic backdrop, any rally in equities is likely to be short-lived, and a clear dovish shift in monetary policy will be needed for a durable rally.
For the first time since the 2008 Financial Crisis, global money managers are expressing what a Bank of America survey suggests is a “dire level” of pessimism that could indicate a possible bottom in equity prices.
Some of the biggest investors in the world have cut their equity allocations on increased concern that tighter central bank monetary policy and higher interest rates will affect company valuations at a time when economic growth appears to be slowing.
Fund managers this month reduced their net overweight position in stocks to their lowest level since October 2008, when the fallout of the Lehman Brothers collapse first started to hit markets.
Cash holdings meanwhile have soared to a 21-year high of 6.1% of assets under management, according to the BoA survey of 259 investment managers with combined assets of US$722 billion and which was published yesterday.
The BoA survey suggests that professional investors aren’t yet convinced equities have bottomed out especially given the macroeconomic uncertainty – soaring inflation, war and slower growth.
Slower growth from higher interest rates is expected to hit corporate bottom lines and some of the world’s biggest firms are already expressing caution in their previously aggressive hiring and expansion goals.
BoA’s survey also revealed that over 58% of respondents were taking lower than normal levels of risk in their portfolios, with increased allocation to defensive U.S. sectors, including healthcare, utilities and consumer staples, which are seen as less vulnerable to recession.
More money is flowing into the dollar and dollar-denominated assets as well, with global money managers rotating out of eurozone equities, while bonds, especially U.S. Treasuries, have seen an uptick, which is helping to put a lid on yields.
Prolonged high inflation in the U.S. now has investors betting that the U.S. Federal Reserve will raise rates by another 1.5% this year, and median estimates of the Fed’s rate will likely end the year around 3.4% up 1.5% from estimates in March.
Against the gloomy macroeconomic backdrop, any rally in equities is likely to be short-lived, and a clear dovish shift in monetary policy will be needed for a durable rally.
