To The Moon

Every month, Bank of America (BofA) conducts a Fund Manager Survey (FMS) that polls major institutional investment managers to establish a running gauge of how the world's most enduring investor class is evolving its market outlook in response to macroeconomic conditions. The latest survey took place between 8th of July and the 15th and polled 293 panelists with $800 billion in Assets Under Management (AUM). The results were released on the 19th and, so far, have been the strongest and least ambiguous so far this year. 

Right at the outset, the survey's panelists now have a consensus opinion: : a very strong expectation of recession.

The panelists strongly disagree that corporate profits can be expected to improve in the near future:

As confirmed by trends in bond yields in a recent article, most panelists don't expect to find higher yields in long-term bonds.

In an interesting development, cash levels held by FMS panelists have, on average, been the highest since 2001. "Cash", in this case, refers to equities held by institutional investors for quick conversion to cash via sales as opposed to mid- to long-term holdings. The tax liability is potentially higher in "cash" but lower in long-term holdings.

The most crowded trades - and by extension, the most volatile and overvalued - have seen a substantial change relative to the previous month's survey results. The US Dollar is now the most crowded while fewer panelists think oil/commodities is. Fewer panelists consider US treasuries to be relative unattractive, despite lower yields expected. Interestingly, a small number of panelists are showing signs of souring on Chinese stocks. This might increase in the coming months for reasons expounded upon in last week's article.

There's an interesting trend in the panelists' perception of risk. While most panelists disagree that they're taking higher than normal risks, BofA points out that fewer panelists had disagreed at a time when Lehman Brothers - a prestigious and historic investment management firm - had gone under in 2008. Given the expectation of a recession, the high cash levels and low expectations on long-term bond yields, the underlying message is that this perception might be flawed.

Interestingly, this perception is also supported by the self-declaration that they're not overweight on equities as opposed to cash. Note: "Overweight" here means whether they consider their position in an asset class having a disproportionate risk contribution to their portfolio.

In terms of positioning, these perceptions are negated by the overall change in market focus: the panelists are short global equities, eurozone and tech stocks while they're substantially long on cash and consumer staples.

The expectation of a disproportionate positive effect is being reposed in cash, alternatives and commodities. Meanwhile, equities and bonds are considered to be the most problematic.

It bears remembering that fund managers cannot unilaterally change their portfolios' asset mix; they're expected to - at least broadly - build strategies around their clients' expectations. However, the relationship between manager and client is a two-way street: when the former gets more bearish on an asset class, subsequent interactions with clients will enable them to form the change in asset mix for their portfolios to be more in line with their expectations. 

As BofA's strategists revealed in a note after the release of the survey's results to the bank's clients, “Everyone is bearish but no one has sold", adding that for every $100 of inflows since January 2021, just $2 have flowed out from tech stocks and $3 exited from equities overall. The strategists also warn that “flows are starting to catch up with sentiment”.

Given that holdings in "cash" indicates a preparedness to generate profits in the shortest possible time and the fact that long-term holdings in equities generally causes a lower tax effect than short-term holdings, it's very possible that major institutions are looking to sell off a portion of their holdings. Meanwhile, other sources report that retail investors (also known as "individual investors") have continually bought into U.S. stocks. 

This is a disconnect of sorts between "Big Money" and investors with smaller dollar-value portfolios. Firstly, it bears remembering that institutional volumes are substantially larger than retail volumes. Thus, if the overall "majority player" sentiment is bearish with institutional investors looking to generate profits off bear markets, a phased selloff is arguably inevitable, For retail investors, it makes all the more sense to strongly consider tactical market opportunities as opposed to the pursuit of company growth narratives.

Asian nand European investors have a leg up in this area over U.S. investors, thanks to a wide variety of "leveraged" (i.e. +2X, +3X, etc.) products on both single names as well as broader indices ideal for upward-trending trajectories and "leveraged inverse" (i.e. -2X, -3X, etc.) during the downside through the Tiger platform. 

Now is the time, more than before, for retail investors to consider a paradigm shift on the means adopted for making profitable investments. Past articles have shown a wide number of Exchange-Traded Products (ETPs) in different tickers; there are about 130+ more by the same issuer. Some interesting ones to consider at this point would be:

• $QQ3S for a -3X exposure on the tech-heavy Nasdaq 100
• $SPYS for a -3X exposure on the broader S&P 500.
• $LS -3X SHORT CHINA TECH ETP(KWES.UK)$ for a -3X exposure to China Tech
• $LS -3X SHORT CHINA ETP(CHNS.UK)$ for a -3X exposure to the broad Chinese market

For articles on broader economic events that are tangential to tactical market movements, visit asianomics.substack.com