The pessimism of professional investors cannot be any more contrasting to the new 11-year for the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.
One group will end up looking foolish – and not in the good Motley Fool kind of way!
The June survey of money managers by Bank of America Merrill Lynch (BoAML) found that this group has not been this downbeat about stocks since the global financial crisis (GFC) in 2008, while the ASX top 200 benchmark jumped 1.1% to 6,641 – its highest since the GFC and less than 200 points from its all-time high.
The BoAML survey may be of US money managers, but given that our market has a tendency to march to the beat of Wall Street, ASX investors better sit up and pay attention.
Cash is king – once again
Money managers in question control around US$528 billion between them and they are responsible for deciding which asset class to invest their clients' capital.
The survey found that allocation to equities plunged by the second most on record, while cash holdings increased by the most since 2011, reported Bloomberg.
Money managers cited worries about US President Donald Trump's global trade war campaign, a possible recession and monetary policy impotence for their cautious stand.
Hopes that Trump and Chinese President Xi Jinping will strike a reconciliatory note on the sidelines of the G20 meeting in in Japan next week is fuelling today's market rally.
One might also think Trump would be motivated to come to a compromise as he officially kicked off his re-election campaign for the 2020 poll. A full-blown trade war would almost certainly drag the US economy into a recession, and that would greatly hamper his efforts to win a second term.
Is the pessimism justified?
But investors shouldn't be fooled into thinking a resolution could come quickly and I think it's more likely than not that an agreement won't be struck for months – if not longer.
"Fund manager survey allocation is implying recessionary conditions," said Bank of America strategists in a note.
"Investors are overweight assets that outperform when interest rates & earnings fall and underweight those positively correlated to rising growth and inflation."
Unsurprisingly, trade war concerns are top of mind with 56% of respondents saying it's the top tail risk. Interestingly, the group believes that the US Federal Reserve will cut rates if the S&P 500 index fell to 2,430 and expect Trump to seek a comprehensive trade deal if the benchmark dropped to 2,350. The index closed at 2,918 yesterday.
Central bankers aren't supposed to take their cue from stock markets. Employment and inflation are meant to be their top priorities.
But since the GFC, the market believes there is a Fed "put" on the market (a borrowed trading term to imply that the Fed would act to support the market if it fell too far).
One has to wonder if our ultra-conservative Reserve Bank of Australia (RBA) has a market-level marker it's watching too.
