Big US Fundies Pivot Back to Value Investing

By Glenn Dyer | More Articles by Glenn Dyer

Tech’s out, so growth stocks are out as a result, value investing is now back in favour but inflation still remains a transient factor for most big global investors, according to the January fund managers’ survey from Bank of America.

In fact the survey shows by global managers are surprisingly upbeat about the global economy and growth which sits oddly about all the gloom about omicron, Russia invading Ukraine and political instability in the US.

As a result big global fund managers have cut their overweight positions in tech to their lowest levels since 2008 – in the immediate aftermath of the GFC.

The survey (carried out from January 6 to 13) revealed that investor optimism about the post-pandemic reopening is overcoming worries about higher interest rates, even though managers expected at least three rises this year from the US Federal Reserve, up from two forecast in the December survey.

The closely-watched survey – which polled 239 fund managers running at total of $US1.1 trillion about their positioning – found investors had been increasing exposure to shares and commodities while avoiding bonds and other defensive assets at the start of 2022.

‘Hawkish central banks’ raising interest rates was the main risk that fund managers were worried about at present with 44% citing this as their leading concern, followed by inflation (21%). Just 6% said a resurgence in COVID-19 is the biggest risk, even though it is a big risk to current levels of economic activity in the US, Australia, Japan, China and much of Europe and the UK.

The fund managers see the Fed’s first rise coming in April, pulled forward from the previous forecast of July.

But with the US central bank holding its first meeting of the year next week, there is some wariness about an early rate rise at that meeting in some parts of the markets.

The confidence that inflation will prove transitory (only 36% think inflation is permanent) is at odds with the change of heart at the Fed where chairman Jay Powell wants to push rates up ASAP because inflation is now seen as being not so temporary.

Global economic growth will improve over the coming year and get through the omicron wave – just 7% of investors were worried about a recession in the near term and 71% are expecting ‘boom’ conditions of above-trend growth and inflation – hence the positioning in commodities and related stocks.

Wall Street certainly doesn’t share that optimism at the moment.

The survey shows that fund managers have taken more cyclical positioning recently, reflecting their confidence that the economy will rebound as COVID-19 restrictions continue to be eased.

BofA’s analysts said: “Investors are very long equities, particular in the EU, as well as cyclical banks, commodities and industrials while they shun bonds, defensives (utilities, staples) and emerging markets”.

In January, there was a 21 percentage-point jump in the allocation to banks; investors now had a net overweight of 41% to them, close to the all-time high set in October 2017. Fund managers know rising interest rates are good for banks.

Meanwhile, fund managers’ net overweight to commodities was at its highest ever.

In keeping with this pro-cyclical stance, there has been a significant increase in the number of fund managers who expect the value style of investing – which tends to perform better when the economy is stronger – would beat the growth style in the coming 12 months.

A net 50% of investors said value would outperform growth, up 39 percentage points in the space of a month.

At the same time, they were “very underweight” assets that were vulnerable to interest rate hikes, such as tech stocks, consumer staples businesses and bonds. Fund managers’ underweight to bonds stood at 77%.

The net overweight to tech stocks – which had been the darlings of the stock market for much of the past decade – was “drastically” cut to 1% in January. This was down 20 percentage points from December and took the allocation to tech to its lowest since December 2008.

That helps explain the recent weakness in Nasdaq-listed tech shares.


About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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