ANNOUNCEMENT: Expert Investor is now PA Europe. Read more.

Equities ditched as managers expect dramatic profit drop

‘The risk/reward profile looks less compelling’


Adam Lewis

Amid a generally more cautious outlook, global fund managers dropped their equity allocation to the lowest level since January this year and took cash to its highest overweight since October 2020, according to the latest Bank of America Merrill Lynch fund manager survey.

According to the August survey, just a net 27% of managers forecast global economic growth to improve over the coming year, which is the lowest figure since April 2020 and down from the 91% peak in March this year.

Global profit expectations also fell drastically, with the net percentage of managers expecting profits to improve falling 41%, its lowest level since July last year and down from the 89% peak in March.

To reflect this cautiousness, the percentage of managers who said they are overweight in equities fell four percentage points month-on-month, from 58% to 54%, which is the lowest level recorded since January.

At the same time, the allocation to cash rose one percentage point to its highest level since October last year, while the allocation to commodities fell 12 percentage points to a net 17% overweight, the lowest total since November 2020.

On the matter of inflation, having peaked in April with a net 93% of managers expecting higher global CPI, in August just a net 4% predicted inflation to rise from here. A smaller majority of investors also think inflation is transitory at 65% (down from 70% in July) while only 32% say inflation is permanent.

Looking at regions, managers increased their holdings in the US in  August, while the percentage of those overweight in Europe, the emerging markets and Japan all fell month-on-month.

Double reversal

In its latest asset allocation update, T Rowe Price said that it remains mostly underweight in equities relative to bonds and cash within its multi-asset portfolios.

“The risk/reward profile looks less compelling for equities and could be vulnerable to fading policy support, higher rates, elevated inflation and potential tax increases,” said Yoram Lustig, head of multi asset solutions, Emea.

Within equities, Lustig said T Rowe continues to favour value-oriented equities globally, US small-caps and emerging markets stocks as it expects cyclically exposed companies to continue to benefit from strong economic growth and global reopening.

“The story for value may not be over just yet, as recent underperformance has led to more attractive valuations, global growth remains above trend and supply/demand imbalances continue to keep inflation stubbornly high,” he said.

“With the hopeful containment of the delta variant and increasing regulatory pressure on growth stocks, investors may start betting on value pulling off a double reversal of this cycle.”