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 fallen sharply.
In fact, the chart below shows that fund managers have never been so pessimistic about growth. Not during Covid and not during the Financial Crisis. The mismatch between expectations and positioning is extreme.
And it does not stop there. The 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 anxious, equities do not fare too well.
TINA
Why do fund managers remain overweight equities despite their negative expectations? It is hard to say. Stock market volatility is high and correlations between asset classes are shooting up in all directions.
Another important reason is probably that fund managers, like many other investors, do not see any better investment options. There Is No Alternative, or TINA, forces fund managers towards equities.
But with the recent rise in interest rates, TINA is not so obvious anymore. Especially in the United States, the equity risk premium has fallen sharply as a result of rising interest rates. From a valuation perspective, US government bonds have become much 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 the portfolios of fund managers that make the prices move? Or do fund managers adjust their positioning based on the developments in the stock markets?
In this extreme case, it seems obvious to me that when fund managers still decide to reduce their equity positions, this will reinforce the decline in the stock markets that has already started. In my opinion, this is also one of the reasons why the Nasdaq posted a 4 percent decline last week.
Jeroen Blokland is founder of True Insights, a platform that offers 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 week on Investment Officer.
Related articles on Investment Officer Luxembourg: