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Changing tune

Bad news is good news again, as far as investors are concerned. The latest BofA fund manager survey reveals a slump in macroeconomic optimism is helping propel equity allocations higher.

So while global growth and global profit expectations have fallen back to their lowest levels since May 2020, risk-asset allocations continue to rise. We discussed this ‘there is no alternative’ positioning yesterday, but this is as much a ‘Goldilocks’ environment as anything else. A weaker growth outlook means rates stay lower for longer, and risk assets continue to prosper.

This all-too-familiar backdrop doesn’t spell good news for all shares. Positioning in small-cap or value names is back to October 2020 lows, according to the survey. But allocators aren’t hunkering down entirely: some cyclical plays, like materials, continue to find favour even as a retreat from emerging markets takes place.

And right on cue, this macro view was reinforced by today’s US inflation print. Headline price growth came in lower than expected for the first time since October, with core inflation also failing to match expectations.

Economic concerns were less evident in the European version of BofA’s survey. But here too there are mixed signals to ponder. The rotation into European equities may feel relatively new, but almost 60 per cent of respondents now predict there will be 5 per cent more upside, max, for the rest of the year.

At the same time, most respondents said the biggest risk to their portfolio is reducing equity exposure too early. Those competing sentiments emphasise the difficulties facing allocators in the months ahead.