Investor Sentiment Has Rebounded to Pre-Liberation Day Levels, BofA Says

Bank of America's June Global Fund Manager Survey indicates a rebound in investor sentiment to a three-month high, driven by easing concerns about trade wars and recessions; however, a net 46% of fund managers still anticipate a weaker economy in the next 12 months. Survey respondents reduced cash levels to a three-month low, increased allocations to emerging market equities, energy, and bank stocks, and are most overweight Eurozone stocks. Investors have also significantly trimmed their exposure to the U.S. dollar, reaching a two-decade low, and now favor international stocks over U.S. stocks for the next five years.

Analysis

Bank of America's June Global Fund Manager Survey indicates a significant rebound in investor sentiment, with the index rising to 3.3, its highest since March, as concerns over a global trade war and recession have eased. This shift is evidenced by fund managers reducing cash levels to a three-month low and increasing allocations to emerging market equities, energy, and bank stocks. While U.S. stock allocations saw a slight increase, managers remain net underweight, favoring Eurozone stocks, which are their largest overweight position, partly due to German fiscal stimulus and a rotation out of U.S. assets. A notable long-term perspective shift shows 54% of respondents now expect international stocks to outperform U.S. stocks over the next five years, compared to just 23% favoring U.S. equities. Despite an improved global economic outlook, with 66% of managers forecasting a soft landing in the next 12 months (up from 37% in April) and a net 36% deeming a recession unlikely, a net 46% still anticipate a weaker economy in the coming year, and 75% expect global stagflation. Corporate financial health is viewed positively; for the first time since late 2015, more respondents see company balance sheets as underleveraged, leading to a strong preference for cash returns to shareholders via dividends or buybacks, the highest since July 2013. Concurrently, investor exposure to the U.S. dollar has fallen to a two-decade low, with the U.S. Dollar Index (DXY) having declined over 9% since the start of the year, reflecting a 'Sell America' sentiment. The survey was conducted between June 6 and 12, following the U.S.-China trade détente but preceding recent escalations in Middle East hostilities.

Key Decisions for Investors

• Investors should consider re-evaluating exposure to the U.S. dollar and potentially increasing allocations to international and emerging market equities, given the pronounced shift in fund manager sentiment and positioning away from U.S. assets.
• Maintain a cautiously optimistic stance by balancing the improved near-term economic outlook and corporate financial health with persistent medium-term risks of stagflation and a weaker global economy, necessitating close monitoring of leading economic indicators.
• Focus on identifying companies with strong, underleveraged balance sheets and a demonstrated commitment or high potential for returning capital to shareholders, as this aligns with prevailing fund manager preferences.
• Be mindful that the survey data was collected prior to the recent escalation of hostilities in the Middle East, which could introduce new market volatility and potentially alter the reported sentiment.