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The increasingly positive sentiment in the financial markets took a hit around the July/August transition, culminating in a 12% drop in the Tokyo Stock Exchange last Monday, only to bounce back almost as much the next day.
The triggering factors behind the downturn were a weak US employment figure and an unexpectedly large interest rate hike by the Bank of Japan. The latter set off significant global capital flows as positions in stocks and bonds financed with loans in Japan were closed in a short period.
The latest major monthly fund manager survey from Bank of America was conducted from August 2-8, capturing much of the turbulent period in the markets. This is evident in the broad sentiment indicator, which summarizes the percentage of cash, stock allocation, and growth expectations, falling from 5 to 3.7 in August on a 10-point scale.
Regarding cash holdings, fund managers have kept it low for several months in a positive spirit, but now it has slightly increased from 4.1% in July to 4.3% in August.
Still quite bullish considering BofA’s rule of thumb that levels above 5% indicate excessive optimism and can be seen as a buy signal for stocks, while levels below 4% constitute a sell signal.
Another figure that has climbed in August is the risk of a US recession. Earlier this summer, 15-20% of respondents identified this as the biggest “tail risk,” events that may not have a high probability but can cause significant damage if they occur. In August, 39% see this as the biggest risk, surpassing “geopolitical conflicts” and “higher inflation” on the tail risk list.
The main scenario, however, is still that the global economy manages to achieve a soft landing in the coming year. 76% of respondents believe in this, with only 13% in the hard landing camp, a slight increase from 11% in July.
One reason why a soft landing is what almost everyone is counting on is a greater confidence in interest rate cuts in the fall, especially in the US. About a third of managers foresee four rate cuts from the Fed this fall, with nearly as many expecting more than four cuts. No one believes that the Fed will refrain from starting a rate-cutting cycle anymore.
An indication that managers have become more cautious is that they have significantly reduced their overweight position in stocks in their portfolios. The net overweight in stocks is now at 11% compared to 33% in July.
Analysis:
The global financial markets are currently facing volatility due to uncertainties surrounding the global economy. Factors such as weak employment figures, interest rate hikes, and geopolitical tensions are influencing investor sentiment. Fund managers are cautiously optimistic about the economy’s ability to achieve a soft landing in the coming year, with expectations of interest rate cuts to support growth. However, concerns about a US recession and a reduction in stock allocations indicate a more conservative approach among investors. It is essential for individuals to stay informed about these market trends and adjust their investment strategies accordingly to navigate the current economic landscape.