Investors Are the Most Bearish on Stocks Versus Bonds Since 2009

(Bloomberg) - Investor allocation to equities relative to bonds has dropped to its lowest level since the global financial crisis as worries about a recession take hold, according to Bank of America Corp.’s global fund manager survey.

In the most bearish survey of this year — the first after banking turmoil roiled markets last month — investors indicated that fears of a credit crunch had driven up bond allocation to a net 10% overweight — the highest since March 2009. A net 63% of participants now expect a weaker economy, the most pessimistic reading since December 2022.

Still, the bearish turn in sentiment is a contrarian signal for risk assets, strategist Michael Hartnett wrote in the note on Tuesday. If “consensus lust for recession” isn’t satisfied in the second quarter, the “pain trade” would be a rally in bond yields and bank stocks, he said. Hartnett was correctly bearish through last year, warning that growth fears would fuel a stock exodus.

US stocks have bounced back from last month’s lows, which was sparked by the collapse of some regional US lenders including Silicon Valley Bank, with the S&P 500 Index now up 8.5% in 2023. Still, some strategists including JPMorgan Chase & Co.’s Marko Kolanovic remain cautious about the outlook for “overbought” technology stocks that have helped fuel this year’s gains.

The rally, however, has moderated this month as data show a softening in the labor market, raising worries that the economy could contract later this year. Last week, Bank of America’s Hartnett also soured on tech shares, opting instead for cheaper global stocks like banks. He recommended selling the S&P 500 in the 4,100- to 4,200-points range, which is where the benchmark is trading Tuesday.

In April, the “most crowded” trades deemed by global managers were long big tech stocks (30%), short US banks (18%), long China equities (13%), short REITs (12%), long European equities (11%) and long US dollar (5%), Hartnett wrote in the global fund manager survey Tuesday. What’s more, managers are the most overweight defensive stocks versus cyclicals since US equities bottomed in October.

A credit crunch and a global recession are seen as the biggest tail risks to markets, followed by high inflation that keeps central banks hawkish, Hartnett said. A systemic credit event and worsening geopolitics are also among the risks, according to the survey, which ran from April 6 to 13 and canvassed 249 participants with $641 billion in assets under management.

With that said, 35% of those polled expect the Federal Reserve to begin an “easing cycle” in the first quarter of 2024, while 28% expect that to take place sometime in the final three months of 2023. That’s in line with the swaps market, which is wagering that the US central bank will end its tightening campaign around mid-year and cut interest rates by year-end.

Nearly half of managers anticipate that there will be one final quarter-point rate hike from the Fed at the conclusion of its May 2-3 meeting before policymakers pause, which would take the benchmark funds rate to a range of 5% to 5.25%.

Other highlights from the survey include:

  • About 84% of respondents see a pullback in global consumer price inflation, while 58% predict lower short-term rates, the most since November 2008

  • Allocation to cash remained above 5% for 17 consecutive months — second only to the 32-month dot-com bear market

  • About 80% expect the US debt ceiling to be raised by September

  • A net 49% of investors expect IG bonds to outperform HY bonds over the next 12 months — the most on record

  • US/European commercial real estate seen as most likely source of a credit event, followed by US shadow banking, US corporate debt and a Treasury debt downgrade

(Updates to fourth paragraph, adds fifth through ninth paragraphs)

By Sagarika Jaisinghani and Jessica Menton
With assistance from Michael Msika


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