Fund managers have moved to their most bullish positioning of 2020, according to the widely followed Bank of America Fund Manager Survey, as news of a Covid-19 vaccine emerged and the US election resulted in a more positive outcome for markets as Joe Biden was named president-elect.
Fund managers became more optimistic about the path out of the pandemic this month, with many now expecting a credible vaccine to be announced in January rather than February.
And they have become more bullish about the prospects for the global economy with a net 91 per cent of respondents expecting the economy to be stronger in the next 12 months, a 20-year high.
Some 44 per cent of fund managers expect the economy to get ‘a lot stronger’ in the coming year, 8 percentage points higher than in September.
Furthermore, 66 per cent of fund managers consider the global economy is now in the early-cycle stage as opposed to 19 per cent who believe it is still in recession. This is a key recovery milestone for the bank and was observed in both 2009 and 2012.
But investors might want to tread carefully with so much optimism about.
Michael Hartnett, chief investment strategist at Bank of America Securities, said the survey suggests that markets are moving close to ‘full bull’ positioning at which point they should be sold.
According to the bank, the re-opening rotation will be complete once Europe and energy stocks rally.
As such, contrarian bulls may want to consider positioning for the “re-opening rotation” by adding long positions in Japan, eurozone and UK stocks
Hartnett added: “Re-opening rotation can continue in Q4 but we say ‘sell the vaccine’ in coming weeks/months as we think we’re close to ‘full bull’.”
Indeed, there was an 18 percentage point monthly increase in the proportion of survey respondents taking higher than normal levels of risk, up to a net 6 per cent of fund managers.
As such, cash levels fell to 4.1 per cent, close to triggering ‘sell’ signals for the bank’s Cash Rule – triggered when cash levels fall below 4 per cent.
Cash levels have now fallen by 1.8 percentage points in the past seven months, the fastest drop in the history of the survey.
It was also reflected in managers’ equity holdings, where 46 per cent are now net overweight – with a figure in excess of 50 per cent representing ‘extremely bullish’ sentiment. Bond allocations fell 10 percentage points month-on-month, to a net 50 per cent underweight.
Some 84 per cent of asset allocators expect global profits to improve in the coming 12 months, the highest level since March 2002.
Reflecting greater risk appetite in November, asset allocators increased exposure to small-caps, emerging markets, value stocks and banks. Meanwhile, exposure to consumer staples, bonds, Europe and healthcare were scaled back.
On a regional level, emerging market equities are now the most preferred region among fund managers climbing 23 percentage points to a net 36 per cent overweight.
US equities remain popular with allocations climbing 4 percentage points higher to a net 23 per cent overweight, while sentiment towards Japan and Europe fell off. The UK remains the most unloved region with a net 33 per cent of asset allocators underweight.
Indeed, as was seen in markets following the announcement of the Pfizer/BioNTech vaccine, there have been signs of a cyclical rotation underway in the survey as investor sentiment shifts.
A record 21 per cent of asset allocators now expect small-caps to outperform large-caps, while a net 24 per cent of respondents think value will outperform growth stocks.
Nevertheless, there remain caveats to the outlook.
A second wave of Covid-19 ranked as the biggest tail risk in November (41 per cent) – the eighth consecutive month that it has topped fund manager fears – while institutional investors are still concerned about a tech bubble also (19 per cent), which remains the most crowded trade.
However, a new tail risk identified by the bank was the prospect of civil unrest (15 per cent) against a backdrop of the disputed presidential election, with incumbent Donald Trump yet to concede to Biden.
Some 190 fund managers with assets under management of $526bn took part in the survey between 6-12 November.