Stocktake: Fund manager survey ‘screams capitulation’

Bearish fund manager sentiment “screams capitulation”, according to Bank of America’s (BofA) latest monthly fund manager survey, but a major bottom isn’t likely just yet.

Macro capitulation is “done”, says BofA, with global growth expectations near all-time lows. Investor capitulation is also “done”. Cash accounts for 6.3 per cent of portfolios, a 21-year high. Similarly, the percentage of investors overweighting stocks is near record lows.

Policy capitulation is not done but it is starting, says BofA. It says investors forecast rate cuts at all big market lows. Right now, a growing minority see rising odds of a Federal Reserve pivot in the next year. Lower inflation is the most likely reason why the Fed will stop tightening, although there’s been a big increase in the number of investors worrying a global credit event will force a Fed U-turn.

Markets bottom when all the bad news is reflected in market prices, so apocalyptic sentiment indicates there are “tasty morsels” for another bear market rally.

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Nevertheless, BofA says a major market bottom is unlikely until we see policy capitulation. Fed cuts are more likely to become consensus in the first half of 2023, with a “big low” followed by a big rally. Until then, it’s a case of “no cuts, no glory”.