Fund managers have taken a much more optimistic stance on markets in recent weeks, piling into equities and value stocks in the belief that the threat of a global recession has receded. Value investing is a strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.
Professional investors around the world upped their equity allocations, with the average weighting reaching a one-year high, according to the November issue of Bank of America Merrill Lynch’s (BAML) monthly survey of global fund managers. Equity allocations rose to a 21 per cent overweight position.
Fund managers' cash levels also fell from October’s average of 5 per cent to 4.2 per cent, suggesting that they are less cautious. This is the lowest average level of cash since June 2013 and the steepest monthly fall in levels of this asset since November 2016.
The shift may be due to a brighter outlook on the global economy. While many investors have spent 2019 worrying about a slowdown in global growth even though markets have continued to surge ahead, the survey found that concerns about a recession had now vanished. A net 6 per cent of respondents said they expected global growth to improve in the next 12 months, up from a net score of -37 per cent. This represented the biggest monthly jump in growth expectations since the survey’s records began in 1994.
And the proportion of respondents expecting global corporate profits to deteriorate in the next year fell significantly, from a net 35 per cent to a net 10 per cent. But BAML added that earnings expectations still look subdued in absolute terms.
As part of this new outlook, fund managers appeared to hold greater inflation expectations, with a net 31 per cent of respondents expecting higher inflation in the next 12 months. As a result, many more now favour investments that could prosper amid higher inflation and any rise in interest rates that this could trigger. BAML noted that portfolios were “no longer explicitly geared to assets that outperform in a low growth and low inflation backdrop”.
Value stocks such as banks, which tend to rely on economic growth and rising interest rates to perform well, grew in popularity. The survey found that investors had bought banks and other value stocks, and upped their allocations to European equities.
“A net 34 per cent [of respondents] expect value stocks to outperform growth stocks, up 21 percentage points from last month,” BAML said. “This is the third biggest monthly swing to value since 2007.”
At the same time they sold defensive holdings including bonds, utilities and consumer staples businesses. Bond allocations slipped to a net 47 per cent underweight position, the lowest level since November 2018.
However, many investors have retained heavy exposure to some of the best-performing stocks of recent years, while tending not to restrict their exposure to the value element of the market. Survey respondents generally still had large positions in growth sectors such as technology, while staying underweight on deep-value areas such as materials and energy.
The shift in sentiment reflects some recent market developments. A thaw in the US/China trade war could help reduce the risks of a global economic slowdown and value stocks have shown signs of a resurgence in recent months. Value-style investments have lagged their growth counterparts during the last decade, but some anticipate a comeback.
The survey also found that fund managers increasingly expect governments to boost growth via fiscal stimulus.
However there are still concerns. When asked to identify the biggest tail risks this month, 39 per cent of respondents cited the trade war, 16 per cent said a bubble in bond markets, 12 per cent cited an inability of central banks to influence economies, and 11 per cent said a slowdown in the Chinese economy.
