Stocktake: Mixed signals for contrarians in fund manager survey

Fund managers are bearish, according to Bank of America’s (BofA) latest monthly fund manager survey, but contrarians shouldn’t be getting excited just yet.

Investors who like to heed Warren Buffett’s advice about buying when others are fearful will note the latest survey shows global growth optimism at all-time lows. Fund managers see financial market risk levels as similar to March 2020’s Covid shock and the 2008 global financial crisis. Cash levels have fallen from last month but remain very elevated.

Poor sentiment means BofA’s Bull and Bear Indicator has fallen to 2.0, triggering the bank’s contrarian buy signal.

However, BofA notes some red flags. Despite plunging global growth and profit expectations, investors actually got slightly more bullish on stocks. Equity allocations remain depressed, but are “nowhere near ‘recessionary’ close-your-eyes-and-buy levels”, with BofA saying there is a “staggering disconnect” between economic expectations and stock allocations.

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Similarly, while 85 per cent expect European earnings to fall over the next year, only 28 per cent envisage stock market downside. In contrast, 59 per cent think European stocks will hit new highs.

BofA thinks equity investors may be underestimating the risks. It remains in the “sell the rally” camp, saying the January-February selloff was likely the “appetiser, not main course” of 2022.