The latest edition of the Bank of America Global Fund Manager Survey shows that fund managers are still overweight equities while their expectations of future economic growth have come down considerably.
Indeed, the chart below shows that fund managers have never been so pessimistic about growth. Not during Covid and not during the Great Financial Crisis. The ‘mismatch’ between expectations and positioning is extreme.
And it doesn’t stop here. These same fund managers also see very high risks to financial market stability. Historically, extreme concerns about market stability have been accompanied by significant year-on-year declines in the S&P 500 Index.
As the chart above shows, the relationship between stability risks and the movement of US stock prices is far from perfect. However, recent days confirm that when fund managers get extremely worried, equities do not do too well.
TINA
Why do fund managers remain overweight equities despite their negative expectations? Firstly, it is hard to pinpoint. Stock market volatility is high and correlations between asset classes are shooting in all directions.
Another important reason is probably that fund managers, like many other investors for that matter, see no better investment options. There is no Alternative, or TINA, is forcing fund managers towards equities.
But with the recent rise in interest rates, TINA is no longer so obvious. Especially in the United States, the equity risk premium has fallen sharply due to rising interest rates. From a valuation perspective, US government bonds have become a lot more attractive.
Chicken and egg
Positioning/fund flows and equity prices are always a bit of a chicken-and-egg story. Is it the shifts in fund managers’ portfolios that cause prices to move or do fund managers adjust their positioning based on stock market developments?
In this extreme case, it seems obvious to me that when fund managers still decide to lower their equity positions, this reinforces the fall in stock markets that has already started. In my opinion, this is also one of the reasons why the Nasdaq put a -4 per cent on the boards this week.
Jeroen Blokland is founder of True Insights, a platform that provides independent research to build diversified multi-asset portfolios. Blokland was most recently head of multi-assets at Robeco. His “chart of the week” appears every Monday on Investment Officer Luxembourg.