BofA fund manager survey suggests markets could bounce

Are the bears set to turn bullish?

Chief Strategist Michael Hartnett at Bank of America (BofA) comically titled the July fund manager survey “I’m so bearish I’m bullish”.

On several of survey measures, money managers are pointing towards further doom and gloom. So much so that the historically bearish sentiment hints at a potential rally to the upside should market conditions only marginally improve.

The majority of the 259 managers representing $722 billion in combined assets under management are taking lower risks than normal, with increased positions in defensive asset classes.

Cash levels increased to 6.1 per cent, up from 5.6 per cent in June. It might not sound like a lot, but this is the most cumulative cash held by managers since 9/11 hit in 2001.

Managers are preferring stakes in corporate debts over corporate profits, with equity allocations compared to bonds reaching their lowest level since March 2009.

Investors will recall this is the month investment bank Lehman Brothers went under, pushing financial markets into panic mode as the fear of contagion grew.

On a positive note, the last two times relative equity allocations fell this low, shares rallied considerably in the subsequent 12 months.

“Max bearishness”

The Bull & Bear indicator, which measures the overall sentiment of market participants, is currently stuck at max bearish. Again, even a small improvement suggests markets could go higher.

Managers are currently long defensive sectors like staples, utilities and healthcare. Unsurprisingly, positions in banks, technology and consumer discretionary are being shunned.

Respondents are particularly concerned over the economy, with 79 per cent expecting a weaker economy in the next 12 months, the lowest on record. The same percentage of managers also expect corporate profits to deteriorate.

Uncertainty still plagues investors

The July quarterly reporting in the United States and the August annual numbers from Australian companies will go some way to deciding which way the market moves next.

The actual numbers should be reasonably strong, but it will be the forward outlook by management teams that will capture investor attention.

Judging by the BofA survey results, managers are expecting profits to reverse materially. But analyst earnings expectations imply marginal growth in 2022.

It’s little surprise then investor sentiment is at levels usually only reserved for economic crises. Managers are waiting for the downgrades to flow through before diving back in.

Macroeconomic concerns continue to weigh on respondents.

Inflation could peak in the coming months, but this will be replaced by anxiety over the impacts of rapid central bank interest rate rises.

War in Europe is also weighing on the region, with a potential energy crisis coming to the fore as the Northern Hemisphere approaches winter.

Lachlan Buur-Jensen

Lachlan is an experienced journalist writing across The Inside Investor and The Inside Adviser.