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‘Peak Pessimism’ in Markets Is Over, but Hope Is Fragile: BofA Survey

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Investors’ global growth expectations continued to move upward in June, their cash levels plunged and their risk appetites surged, according to the latest Bank of America Global Research global fund manager survey, released Tuesday.

In short, Wall Street has moved past “peak pessimism,” the survey found. However, June optimism is “fragile, neurotic, nowhere near dangerously bullish.”

A record net 78% of fund managers said the stock market was overvalued, the largest such response since 1998.

The survey was conducted June 5 to 11 among 212 panelists with $598 billion in assets under management. Just 18% expected a V-shaped recovery, compared with 64% who expected a U- or W-shaped one.

In addition, 37% said they were seeing a bull market, while 53% maintained it was a bear market rally — but down from 68% who said this in the May survey.

Forty-nine percent of fund managers in the June polling said a second wave of the coronavirus was the biggest tail risk. Fifteen percent cited permanently high unemployment, 10% the outcome of the November presidential election and 9% a trade war.

Net 61% of respondents said they expected global growth to strengthen in the next 12 months, up 23 percentage points from May and the highest level in 41 months, according to BofA.

Inflation expectations increased by 31 points to net 21% expecting a higher global Consumer Price Index in the next 12 months.

Net 67% of fund managers expected below trend growth and inflation in the global economy over that period, down 10 points from the May survey.

Cash levels in June dropped to 4.7% from 5.7% the previous month, the biggest drop since August 2009, according to BofA, which noted that this was led by institutional, not retail, investors.

According to the fund manager cash rule, when average cash balance rises above 4.5%, a contrarian buy signal is generated for equities. When the cash balance falls below 3.5%, a contrarian sell signal is generated.

Investors’ cash allocation fell 11 points month over month to net 33% overweight. Although overweight cash positions have fallen 21 points in two months, they remain elevated relative to history, BofA said.

In June, the equity allocation rose 22 points to net 6% overweight, the first time respondents had reported being net overweight since February. Allocation to U.S. equity fell two points to 22% overweight, but the U.S. remained fund managers’ favored region.

Investors’ June allocation to bonds dropped 13 points to net 26% underweight.

Seventy-two percent of investors said long U.S. tech and growth stocks was the most crowded trade in June, up from 60% who said this in May.

Nine percent cited long cash, 6% long U.S. Treasurys and 4% long gold.

As to what the post-pandemic world will look like, 68% of survey participants said the biggest structural shift would be supply chain reshoring, 48% cited a rise in protectionism and 43% said it would be higher and new forms of taxation.

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