The latest monthly Fund Manager Survey by Bank of America confirmed what recent market actions have already demonstrated, namely that, as BofA Chief Investment Strategist Michael Hartnett explained, there is a “big market conviction in Goldilocks leading to capitulation into risk assets” while at the same time sending Fund managers’ cash levels to a 4-year low, and pushing “risk-taking” to a new all-time high, surpassing both the dot com and the 2007 bubbles.
BofA’s takeaways from the survey, which polled a total of 206 panelists with $610 billion in AUM, will not come as a surprise to those who have been following this survey in recent months, and which reaffirms that while investors intimately realize how bubbly assets have become, they have no choice but to buy them.
The latest survey highlights:
It’s still all about FAANG froth: the biggest market conviction is in Goldilocks (+ price action in FAANG/BAT, Bitcoin) resulting in bull capitulation; A stunning chart shows that risk-taking among Fund Managers hit an all time high in the lastest period…
… even as cash levels grind lower despite a record high number saying equities overvalued. Indeed, as the next chart demonstrates, while the number of respondents saying equities are overvalued is at 48% – a new record high – cash levels continue to fall. Coupled with the record high number of “risk takers”, Bank of America concludes that “this is a sign of irrational exuberance“.
Hartnett’s next observation is a carryover from the October Fund Manager Survey, namely the prevailing belief that the economy has entered a Goldilocks state. One month later, this view is now consensus.
Calling it “Consensilocks”: Hartnett notes that there is an all-time high Goldilocks expectations (56% expect “high growth, low inflation”); which contrasts with tumbling bear view of secular stagnation as macro backdrop (was 88% Feb’16, now 25%); US tax reform expected to sustain or inflate Goldilocks. Just as importantly, goldilocks is now the consensus view for the global economic outlook, while the “below-trend growth/ inflation” outlook fell 9ppt to 25%, the lowest since May 11 & a total reversal from Jun’16.
Since this is fundamentally a Hartnett report, a mention of the Icarus rally was inevitable, and sure enough, the chief strategist points out that markets find themselves “ever closer to the sun”. The reason: cash levels among fund managers dropped to 4.4% in November from 4.7%, the lowest since Oct’13 & no longer a “buy signal” according to BofA’ proprietary indicator; FMS hedge fund equity exposure at 11-year high. And while BofA’s Bull & Bear indicator has risen to 7.2, but cash did not fall sharply enough – yet – to trigger 8.0 “sell” signal.
So if this is an “irrationally exuberant” bubble, the next step is clear, only the timing is uncertain. As such, BofA notes that the key correction catalysts are inflation & market structure, while the biggest FMS risk to EPS = wage inflation;
Meanwhile, there are rising fund manager concerns over “market structure” (seen as the 3rd biggest tail risk); strategies most likely to exacerbate correction: vol selling (32%), ETFs (28%), risk parity (16%).
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Her are some of the more notable survey takeaways: crowded trades are #1 long Nasdaq, #2 short volatility, #3 long credit…
… while allocation to global equities in November rose to net 49%, the highest since Apr’15,
… Highest Japan OW in 2-years, an epic FMS UW in UK assets, and big Nov
As a result, for any wannabe “contrarian stagflationists” out there, here are the BofA recommended trades: long UK, short Eurozone; long pharma, short banks; long utilities, short tech.
Putting it all together, here is Hartnett’s conclusion: “Our conviction in winter post-tax reform risk asset correction hardens.“