Investing.com - European markets in the red at mid-session on Wednesday -Ibex 35, CAC 40, DAX...- with investors closely watching macro data.
Bank of America's (NYSE:BAC) survey of fund managers warns of a bearish tone among its experts. "Cash levels jump from 4.9% to 5.3%; 50% net expect weaker global growth; managers remain neutral on equities; the BofA Bull & Bear indicator is at 2.2, near the buy signal," the report says.
In the macroeconomic environment, managers have increased expectations of a "hard landing" (30%), although a "soft landing" (59%) remains investors' strongest assumption. In part, the survey notes, "thanks to a rising global earnings outlook due to a pick-up in optimism in China; lower inflation (80%), a steeper yield curve (75%), lower short rates (73%) and lower bond yields (56%)".
On monetary policy, a record number of respondents say that "monetary policy is too tight and fiscal policy too loose" (a policy mix that is as bearish for fixed income as it is bullish for the dollar). Asked about the driver of rising bond yields, 50% say government debt and deficits, compared to 32% who believe that a strong economy would encourage government deleveraging.
"Top managers want companies to improve their balance sheets: 53% ask CEOs to improve balance sheets, 25% to increase capital expenditure, 15% to return cash to investors; only when yields peak will leverage outweigh quality," say BofA's managers.
In terms of portfolio management, there is a rotation in October from Europe and emerging markets out of commodities and utilities (high leverage) into commodities and energy.
Inflation and high rates are seen as a problem of the past
95% of BofA respondents expect European inflation to decline over the next year, up from 75% last month and the highest proportion on record (with data going back to 2000). "While central banks' hawkish stance in response to high inflation remains the biggest tail risk to markets for a plurality of 31% of investors (followed by geopolitics at 23%), this nonetheless marks the lowest proportion since May, down from 45% in August," the survey notes.
Some 62% believe short-term interest rates will fall over the next twelve months, close to a 15-year high, while a net 31% believe 10-year bond yields will fade, a 20-year high.
The consequences of monetary tightening are the main concern
Some 24% of investors believe global monetary policy is too tight, up from 15% last month and the highest level since 2008. "Fifty per cent see demand destruction due to monetary tightening and a fading fiscal impulse as the main macro issue for the coming months," the report notes.
55% expect US growth to slow in response to tight monetary policy, while 40% believe US growth may remain resilient in the near term but will slow next year as Fed tightening kicks in. 73% expect European growth to weaken in response to tight monetary policy, down from 89% last month. However, only 30% of investors see a "hard landing" as the most likely outcome for the global economy (although this is up from 20% last month).
Equities remain bearish in the short term, positive in the medium term
55% of investors see losses for European equities in the coming months in response to monetary tightening (versus 63% last month), but 52% project gains over the next year (versus 61%). "Not having enough defensive hedges to protect against weakening growth is the key portfolio construction risk for a plurality of investors, at 35%," the report said.
Rising bond yields reignite interest in value
A net 20% of participants expect value to outperform growth stocks (up from 11% last month), probably in response to the recent rise in bond yields, with insurance now the largest overweight sector in Europe, following a jump in positioning ahead of pharmaceuticals and technology.
However, optimism on value does not extend to banks, as positioning in the sector remains close to neutral, with 65% believing that slowing growth, falling bond yields and widening credit spreads will be a drag (versus 50% last month).
Cyclical stocks dominate investors' sector underweights, with chemicals, autos and media sectors the least preferred. A plurality of 40% of respondents see downside for European cyclicals relative to defensives in the coming months (vs. 53% last month), while 25% see a slight improvement after recent weakness (vs. 11%).
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Translated from Spanish using DeepL