Today, I thought I would take a look at what the world’s professional money managers are thinking as we head towards 2018.
There’s one market in the world in particular that they really don’t like. Which makes me wonder if it could be ripe for a rally…
Fund managers are hoping to have their cake and eat it
The Bank of America Merrill Lynch (BoAML) fund manager survey is among the few pieces of research from a big bank that I always take the time to look at.
It’s a survey of where global money managers say they are putting their cash, and what they are most worried about. And while it’s not perfect (nothing is), I’ve always found it to be pretty useful in terms of gauging sentiment.
Markets are all about money flows. Whether it’s fundamentals, technicals or whatever else that drives the capital allocation decisions being made, the value of an asset ultimately depends on how much money is chasing it at any given time.
And these things tend to be cyclical – unpopular assets will become popular again and overly popular assets will find themselves relegated to being the wallflower at some point in the future.
There’s no science to it, of course. If there were, this stuff would be easy. But if fund managers are hugely underweight or strikingly overweight on one asset class or other, it’s usually worth looking out for performance to reverse.
It’s also good to see what they are most and least worried about. And it’s interesting to get an idea of how fully invested they are (if they don’t have much cash left to plough into markets, chances are markets are going to take a bit of a knock).
So the first thing that surprised me about December’s survey is that there’s still a faint whiff of caution in the air. Fund managers are actually holding a bit more cash now than they have been on average over the past year – 4.7% compared to an average of 4.5%.
It’s not a big deal – they’re still pretty bullish – but it’s not the “all-in” attitude I’d expected, given the record highs in the US market and all the other bubbly-ness we see around us.
There are what appear to be some real contradictions in there, too. A record percentage of investors still believe that stocks are overvalued, and a near-record still believe that bond markets are overvalued, too. So you have to conclude that there are a lot of “reluctant bulls” in this market.
However, it perhaps makes sense when you realise that most of them (54%) also expect to see the “Goldilocks” world that we live in continue into 2018. In other words, they expect growth to be healthy, but inflation to stay somnolent.
That is very much a “have your cake and eat it” global environment. It’s a world in which stocks and bonds can both easily remain overvalued, because low inflation means there are no interest rate hikes to upset either market; while growth remains strong, and so credit quality and earnings do too (although it’s worth noting that fund managers also say that the biggest threat to corporate profits next year is rising wages – so they are aware of the inflationary threat to an extent).
As for what they’re worried about – fund managers think that “long bitcoin” is the most crowded trade right now. Judging by the collapse in the price this morning, they may have been right.
However, equally, it’s a bubble that none of them were likely to have been participating in (because they’re mostly not allowed). So it’s an obvious, and very convenient candidate for them to single out.
You’re not going to get fired or ridiculed for pointing out a bubble in an asset that you’re not allowed to buy. Do the same for the S&P 500, while it keeps going up, and you’re likely to be in trouble.
What’s more interesting is that, in second place, they think that Big Tech (the US and Chinese tech giants) is a very crowded trade. And in third place, “short volatility” – ie betting that the markets are going to remain calm – is also seen as a busy trade (although again, given that most managers believe in Goldilocks, you can see why this might be a popular trade).
The most despised country in the market
Reading all of this, there are a couple of obvious conclusions. One is that fund managers might not be happy about the fact that nothing is cheap, but they also don’t expect much to disrupt it.
It’s pretty clear that, as we covered earlier this week, a burst of inflation would be about the worst thing that could happen to most of these portfolios because it’s the one that no one is really expecting or planning for. So that is most definitely a threat to be aware of.
And what about contrarian trades? No one is expecting a recession. As BoAML suggests, shorting equities and going long bonds is one of the most contrarian trades you could make going into 2018.
I have to say, though, it’s not one that I’d be happy about making. As I said at the start of the piece, there’s another, more interesting stand out – one market that is uncommonly despised at the moment and which could be ready for a comeback next year.
Indeed, fund managers are more “underweight” this market than at any time since at least 2001, according to the survey.
What country could be so detested, I hear you ask? Well, lo and behold, it’s us.
The UK market is thoroughly out of fashion right now. Indeed, it “remains the consensus short amongst fund managers.”
So if you’re looking for a big surprise for next year, you don’t have to look far. Bet on Britain.