Asset allocators are cutting both cash and equity exposures as they await a meaningful downward surprise to interest rates.
The latest global fund manager survey from Bank of America surveyed 285 panellists with $764 billion in assets under management between 2 and 8 June.
Allocators cut cash exposure to a 19-month low but also their equity exposure to a five-month low while raising their exposure to real estate and alternatives. Equity allocations were a net 32 per cent underweight while bonds were a net 11 per cent overweight, specifically favouring investment-grade bonds and high-yield bonds.
Within equities, the largest decrease was seen in eurozone equities and emerging markets while US equities reached their highest allocation this year with a 14 percentage point move month on month to a net 25 per cent underweight.
Fund managers specifically sought out telco and pharmacy stocks and sold their holdings in consumer staples and energy.
Fund manager sentiment was “stubbornly low”, BoA said, as investors waited for “meaningful downward surprise to rates and/or meaningful upward surprise to growth (no recession)”. The reading was based on cash positions, equity allocations, and economic growth expectations.
Interest rates had been rising globally for the past year, sitting at 4.1 per cent in Australia and 5.25 per cent in America. However, a net 67 per cent of respondents said they are expecting short-term rates to decrease in the next 12 months, up from net 43 per cent at the start of the year.
A net 62 per cent of respondents are expecting a weaker economy in the next 12 months and 87 per cent expected lower global CPI inflation in the next 12 months.
Investors remain very bearish around economic growth with very few thinking the economy would be able to avoid a recession in the next 12 months. However, the recession’s start had been pushed out to as far as the first quarter of 2024.
Cash levels had fallen from 5.6 per cent last month to 5.1 per cent that BoA described as “still high-ish but no longer uber-high” and the lowest weighting since November 2021.
Over the past eight months, cash weightings had come down gradually from 6.3 per cent in October 2022 to 5.1 per cent this month.
The biggest tail risk was high inflation keeping central banks hawkish, followed by a bank credit crunch and global recession.
