Foreign media have reported that fund managers have been cutting their cash positions and deploying risky assets in optimism about the economic recovery to a degree that has alarmed bank of America strategists.
According to a bank of America survey on Dec. 4, solstice, Dec. 10, money managers with a total of $534 billion under management reduced their cash holdings for the first time since May 2013, to 4 percent. Investors are more bullish on so-called “risky” assets such as stocks and commodities than at any time since February 2011, according to Bank of America, making Bitcoin one of the most heavily traded asset classes. The drop in cash exposure triggered a “sell” signal on equities.
“Investment sentiment is bullish, and hopes of a vaccine launch are leading market participants to actively trade on the economic restart theme,” Michael Hartnett and other bank of America strategists wrote in a note. The report says the COVID-19 vaccine will begin selling in the first quarter of 2021.
Bank of America is weighing the year-end dilemma facing many market participants: whether to take profits and take defensive measures in the stock market, or to continue betting that the rebound could extend into 2021.
Investor optimism about the stock market is at its highest level since January 2018, with fund managers’ exposure remaining at 43 per cent, according to the Bank of America survey.
Bank of America said falling cash levels and upbeat growth prospects suggest the market expects an early economic recovery to be similar to that seen after the 2008 financial crisis and the Internet bubble. “Expectations for the speed and magnitude of the recovery have exceeded those of previous recessions,” the strategists said.
The cash squeeze comes as money managers flock to value stocks, emerging markets, the UK, banks and consumer discretionary stocks, reducing exposure to the US, healthcare and bonds. Forty-two percent of investors surveyed expect COVID-19 to start boosting economic growth in the second quarter of 2021, while a record 76 percent expect the yield curve to be steeper.
But while 31% of managers think undervalued value stocks can outperform growth stocks, doing well in tech stocks remains the most crowded trade at the moment, followed by selling the dollar and bitcoin.
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