The volatility in August has led to a bit of a reset in the markets, with high-conviction trades tested by rapid declines. But looking at it from a broader perspective, fund managers have a relatively consistent view of a soft landing scenario.
“The fundamental optimism for a soft landing (76%) and large-cap growth stocks in the US has not diminished,” Bank of America analysts said, adding: “Investors now believe the Fed needs to cut interest rates further to ensure a recession does not occur.”
Cash levels rose to 4.3% from 4.1%, but are still at historical lows.
The survey has certainly seen some deterioration, with the proportion of managers expecting global growth to slow rapidly falling, although it is still higher than levels recorded earlier this year.
55% of fund managers also said monetary policy was too tight, the highest percentage since October 2008.
In general, such surveys are considered to be counter-indicators.
Crowded Deals:
1) Bonds
Despite the recent decline, yields are expected to fall by more than 50%. The last time they were this high was in December 2023, when that was the bottom. What followed was a rise in the 30-year yield to 4.8% from 3.94%. Bond allocations remained low at an 8% net overweight, but that’s a quick turnaround from a 9% net underweight a month ago.
2) China
One area worth paying attention to is China, which has plunged into recession and is at its lowest level since May 2022.
3) Mag 7
When asked about the busiest trade, most fund managers continued to point to Mag 7 but some switched to “short China” or “long 2.”
4) Long-term health care, short-term real estate investment trusts
In terms of internal positioning, the longest overweight positions were in healthcare, technology, equities and the US. Short positions were crowded in REITs, discretionary commodities, materials and Japan.
5) Stock markets remain crowded.
Despite the recent decline in stock prices, managers have historically held onto their equity investments.
6) Bank of America’s Contrarian Ideas
From Bank of America: “Long-term commodities versus equities, long-term net income versus U.S. equities, long-term small-cap value versus large-cap growth; and long-term consumer discretionary versus healthcare.”
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