Fund managers are still wary about stocks

Stocks have rallied in 2023 but investors remain decidedly cautious, according to Bank of America’s (BofA) latest monthly fund manager survey. The mood is a lot less bearish than it was, with cash levels falling from 5.9 to 5.3 per cent – the biggest monthly fall since June 2020. Nevertheless, cash allocations remain higher than normal.

More obviously, a large majority remain underweight global stocks, with current allocations two standard deviations below normal levels. Investors are especially wary of US stocks. The percentage of investors underweight the US has hit levels unseen since Hurricane Katrina in October 2005.

The anti-US turn has been sudden and dramatic, with January’s numbers representing the biggest monthly sentiment shift on record. In contrast, angst regarding Europe continues to recede, with allocations rising to their highest level since February 2022, before Russia’s invasion of Ukraine.

Even with Europe, however, current equity allocations remain below long-term norms.

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Importantly, BofA’s survey indicates recession fears, although still high, peaked in November. Prior peaks in recession fear – for example, like in April 2020 and March 2009 – were “big turning points in asset prices”, says BofA.

Furthermore, for the first time since March 2020, investors see monetary policy as too restrictive. Investors are “telling central banks their tightening cycle has worked too well, and now is time to stop”, says BofA. As with the peak in recession fears, it notes asset prices have “inflected higher whenever monetary policy was seen as restrictive in the past 20 years”.

Overall, the cautious mood suggests investors would be caught off guard by further market gains. The “pain trade”, says BofA, is still up.