In anticipation of a bear market, fund managers have increased cash positions to the highest since April 2022 – early covid-19 pandemic days – while their equities allocation plummeted.
Global fund managers expect stock markets across the globe to enter a bear market, with a more than 20% decline likely this year, Bank of America’s monthly survey showed. Nudged by the Russia-Ukraine war, 60% of the BofA survey respondents now believe a bear market is around the corner in 2022, double of 30% last month. In anticipation of a bear market, fund managers have increased cash positions to the highest since April 2022 – early covid-19 pandemic days – while their equities allocation plummeted. During the last one month, the S&P 500 is down 4.75%, Dow Jones slipped 4%, and the NASDAQ has tanked 8.3%.
Cash levels rise, macro outlook falls
BofA survey showed that fund managers’ cash position is up at 5.9%, from 5.3% last month as investors get more cautious and bearish. Data showed that cash position for fund managers was at similar levels during March and April 2020 as the covid-19 pandemic began spreading across the globe. Cash levels are higher than during the global financial crisis of 2008 and higher than the Euro Debt crisis of 2011-2012. Investors prefer booking profits and holding on to cash when anticipating a bear market. Foreign Institutions have been net sellers of domestic equities for months now.
The macro-economic outlook is weak, according to the BofA survey, the lowest since July 2008 when the Lehman Brothers collapsed. “March FMS showed a 44ppt on-month decrease to net 64% of FMS expecting a weaker economy in next 12 months, the worst since July 2008,” BofA said. The key concern in recent months has been inflation, which has soared to a 40-year high in the US. Fund managers said that inflation could be here to stay with 51% thinking price rise is permanent and not transitory.
While the highest allocation is toward cash, it is followed by commodities, healthcare and energy while they shun bonds, the EU, and discretionary. 48% of the survey participants believe that oil will produce the best returns in 2022, followed by Gold. ‘Long oil/commodities’ has now become the most crowded trade among fund managers, taking over from ‘long US tech’ that was the preferred bet since July 2021. The Russia-Ukraine conflict has forced crude oil prices higher and the sanctions placed on Russia are likely to augment commodity prices further.
Looking at investors’ positioning relative to the average positioning of the past 10 years, BofA said that investors remain war focused with commodities, cash, and staples relative to history while at the same time very underweight assets such as EU, stocks, and emerging markets that are vulnerable to war. Going sector-specific, fund managers have gotten more defensive, rotating from banks and consumer discretionary to technology, staples, and utilities.
Biggest risk ahead?
44% of the survey respondents believe that the Russia-Ukraine conflict is the biggest tail risk facing the globe at this juncture. This has soared up from less than 10% terming it as a risk a month ago. Further, global recession, inflation, and hawkish central banks are also seen as risks. Fund managers expect more than 4 interest rate hikes by the US Federal Reserve in 2022.