Playing safe ahead of the US Federal Reserve’s policy tightening, global fund managers have shunned technology stocks, Bank of America’s Global Fund Manager Survey showed. Fund managers now have the lowest allocation towards technology stocks since 2006. Investors are eyeing the beginning of the rate hiking cycle by the US Federal Reserve and other central banks which is expected to start this year. The survey also showed that investors are also underweight on emerging markets and bonds along with technology stocks — all sensitive to interest rate hikes.
Investors underweight technology stocks
“Investors remain cyclical i.e. banks, materials, commodities relative to history but have increased defensiveness while at the same time very underweight assets that are vulnerable to interest rate hikes — bonds, tech, EM,” BofA said. The most overweight position taken by fund managers is in banks followed by commodities, healthcare, and energy. More and more investment is seen to have moved away from technology stocks and entered energy.
Bearish but not too bearish
The bearish sentiment among fund managers is also indicated by cash levels. “FMS cash up to 5.3% (from 5.0%) as investors got more cautious/bearish,” the survey said. This is the highest level of cash held by money managers since May of 2020. Yet, investors are not believed to be extremely bearish. Of the respondents to BofA’s survey, only 30% of investors expect an equity bear market in 2022 while 66% don’t. Although allocation towards the technology sector is lowest since 2006, the ‘Long Tech Stocks’ trade remains the most crowded, followed by short US treasuries. BofA survey showed that still, 40% of FMS investors think EM equities will produce the best returns in 2022.
Hawkish central bank on watch
Amid the rate hike anticipation, the biggest tail risk seen by fund managers right now is hawkish central banks, followed by inflation and asset bubbles. 7% of the respondents see the Russia-Ukraine conflict as a tail risk, putting it in the fifth spot. With this, for the second consecutive FMS, hawkish central banks have taken the position of the biggest tail risk. FMS investors now expect 4 rate hikes by the US Federal Reserve in 2022.
US Federal Reserve rate hike has now taken over as the biggest tail risk from inflation, which is now close to its 40-year high. However, only 39% of the survey respondents think inflation is permanent while 52% think it is transitory. US Inflation currently sits at a massive 7.5%.