Amid Covid, strongest growth expectation since 2014: Bofa

After a sharp recovery in global equity markets from their March 2020 lows, investor sentiment has turned cautious, with most global fund managers surveyed by Bofa Securities in July saying the markets are overvalued. However, most of them expect a sharp recovery in the global economy.

As many as 210 fund managers with $607 billion worth of assets under management (AUM) participated in the survey, which was conducted between July 2 and July 9.

Of those surveyed, 71 per cent believed the stock market was “overvalued” and 74 per cent dubbed “long US tech stocks” the most crowded trade. That said, 52 per cent of the fund managers surveyed by Bofa Securities said the second wave of Covid-19 pandemic was the biggest “tail risk” to equities, followed by the US presidential election, credit event, and populist policies.

“Cash levels rose to 4.9 per cent, from 4.7 per cent; Wall Street’s $24-trillion rally is yet to elicit “greed”; Bofa Bull & Bear Indicator is at 2.9 — far away from worryingly bullish levels (above 8.0),” stated the Bofa Securities survey, findings of which were released on Tuesday.

Cash levels in institutional funds (pension funds/insurance companies) have risen from 3.3 per cent to 4 per cent in July. On the other hand, cash levels in retail funds (mutual funds/ unit trusts/investment trusts) have dropped from 5.2 per cent to 4.8 per cent in July, suggested the survey.

Among regions, the European Union (EU) is relatively attractive in terms of fiscal policy, with 21 per cent of investors choosing to remain overweight on the region for the next 12 months, up from the 14 per cent in June. Among asset classes, commodities have seen the most allocation since July 2011, with 12 per cent of investors saying they are overweight on this asset class. The allocation towards equities remains low, while that to bonds is high when compared with the past 10 years, the report says.

Global growth

Respondents raised global growth expectations by another 11 percentage points (ppt) to 72 per cent. This is the highest level since January 2014. Around 36 per cent respondents expected the global economy to get “a lot stronger” — most since October 1994. “24 per cent of investors think the economy is in the early cycle, up from 16 per cent last month, while 62 per cent of investors think the economy is in a recession, down from 72 per cent last month,” Bofa Securities said.

However, inflation expectations rose by 16 ppt, with 37 per cent expecting higher global CPI in the next 12 months.