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Fund Managers Maintain Caution Despite Stock Market Rally, BofA Survey Reveals

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Professional Investors Remain Skeptical of Stocks Despite Wall Street Rally

Investors Increase Cash Allocation Amidst Uncertainty

According to the latest Bank of America Global Fund Manager Survey, professional investors are skeptical about the future of stocks and other risk assets, despite a significant rally on Wall Street this year. The survey reveals that even with the S&P 500 up nearly 18% year to date, managers have raised their cash allocation to 5.3% of portfolios, an increase of 0.2 percentage points from the previous month. This cautious move suggests that investors are still concerned about "tail risks," such as elevated inflation leading to policy miscues from central banks like the U.S. Federal Reserve. Overall, sentiment remains low among portfolio managers in terms of cash positions, stock allocations, and the outlook for the economy.

Big Tech and Japanese Equities Seen as Crowded Trades

The survey also revealed that 59% of respondents consider Big Tech to be the most crowded trade, following the 36.1% rally in the Nasdaq Composite. Japanese equities were also seen as crowded. Such concerns have led a net 39% of survey respondents to take less risk than usual, indicating a 2 percentage point increase from the previous month. While stock allocations have reached a seven-month high, they still remain underweight compared to benchmarks. Interestingly, retail investors, as measured by the American Association of Individual Investors surveys, appear to be more bullish, with 66% holding stocks, the highest level since late 2021.

Managers Cut Exposure to Commodities

In a notable shift, managers have significantly reduced their exposure to commodities. In fact, they currently hold their most underweight position in the sector since May 2020. This move can be seen as a "capitulation" from commodities, as professional investors shift their focus away from this asset class.

Concerns about Global Recession

The survey also highlighted worries about a global recession, with 48% of respondents predicting that it will begin in the first half of 2024. However, there is a slim plurality that believes the contraction will start in the second quarter. These concerns reflect the cautious sentiment among professional investors regarding the future state of the global economy.

Contrarian Indicators and Market Implications

It's important to note that sentiment surveys like this one can often serve as contrarian indicators. Therefore, the rising pessimism among professional investors may actually be a positive sign for markets. While they remain skeptical, this cautious stance could help prevent excessive speculation and potential market bubbles. As the market continues to evolve, it will be interesting to see how these sentiments unfold and impact investor behavior.

Conclusion: Navigating the Professional Investor Skepticism

The skepticism displayed by professional investors towards stocks and risk assets despite the Wall Street rally has important implications for new businesses looking to enter the market. The increased cash allocation by portfolio managers reflects their cautious stance amid uncertainty, including concerns about "tail risks" such as inflation and policy miscues from central banks. This cautious approach suggests that investors are prioritizing capital preservation over aggressive risk-taking.

One notable takeaway is the crowded trades in Big Tech and Japanese equities. This raises potential challenges for new businesses in these sectors, as they may face increased competition and saturation due to investor skepticism. On the other hand, the relatively bullish sentiment among retail investors indicates potential opportunities for businesses targeting individual investors.

Additionally, the notable reduction in exposure to commodities by professional investors underscores a shift in focus away from this asset class. This may impact new businesses operating in the commodities sector, as investor interest and funding might decline.

The concerns surrounding a global recession also warrant careful consideration. If such a recession were to materialize, new businesses could face a challenging economic environment with reduced consumer spending and investment.

However, it's essential to consider the contrarian nature of sentiment surveys. The pessimism among professional investors might actually be a positive sign for markets, as it helps prevent excessive speculation and potential market bubbles. This could create a more stable and measured business environment for new ventures, allowing them to grow sustainably.

In summary, new businesses should be cautious and mindful of the skepticism displayed by professional investors. They should carefully analyze their target markets, consider alternative sectors with potential for growth, and ensure their business models are adaptable to changing market conditions. While challenges exist, a measured approach can help new businesses navigate the evolving investment landscape.

Article First Published at: https://www.cnbc.com/2023/07/18/fund-managers-still-cautious-despite-big-stock-market-rally-bofa-survey-shows.html

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