The September survey of fund managers by Bank of America reflects a position of cautious optimism. On the one hand, respondents feel that the economic recession will be avoided, but on the other hand, Managers are clear that the market situation does not encourage them to turn to cyclical assets. Caution continues to be the predominant note in the investments made by managers, and this month they have decided to exit the most cyclical assets, such as commodities, and enter defensive sectors, but above all in those assets that will perform well if fixed income securities continue their good streak, such as the utilities sector. Bonds remain one of managers’ favorite assetsand now they are trying to expose themselves more to passive income, in sectors that generally distribute high dividends and in those that will also benefit if fixed income continues to be the protagonist.
The managers’ positioning is part of a scenario of rate cuts by the major central banks, at a time when the Federal Reserve is preparing to begin its new cycle of lowering the price of money. This change in monetary policy is generally positive for the most indebted sectors, which see their leverage moderate if bond yields fall at the same time as the Fed’s rates. As a result, many managers have now chosen to enter this type of sector, such as utilities, in an attempt to take full advantage of the consequences of the Fed’s rate cuts.
At the same time, executives are increasingly asking the companies they invest in to use their cash flow to pay dividends, and they are increasingly less interested in having them reinvest it or use it to improve their balance sheet. In fact, His preference for dividend distribution is the highest ever observed since 2013High dividends are generally an alternative to bonds for collecting passive income, which explains the strong entry of managers in September into sectors which historically offer attractive remuneration for their shareholders.
The combination is right: high dividends and sectors that will benefit from lower rates. This, in September, resulted in a rotation of managers towards the utilities sector, the eurozone stock market, banks, insurance companies and real estate mainly. In return, respondents divested from cyclical sectors, such as technology, oil and gas companies, industrials, materials but also commodities. The latter, in fact, fell in September to have the lowest weighting in managers’ portfolios since 2017.
The shift toward protection has been rapid and forceful. The relative weighting of the most cyclical sectors relative to defensive sectors is the highest since May 2020, largely due to the fact that there is now the highest weighting since 2008 for the utilities sector, one of the main representatives of the defensives. The managers themselves acknowledge that their positioning is now cautious and consider that they are taking less risk than usual. In fact, They consider their positioning to be the most cautious it has been in the last 11 months.
Fed to offset slowing growth
This positioning of the managers corresponds to a scenario in which the economy slows down (hence the entry of defensives), but which should be offset by the lowering of rates by the central banks (this will benefit bonds and assets that evolve at the same time as bonds). The managers themselves recognize this scenario: their outlook for economic growth is slightly better than in August, but remains moderately negative. According to him, in 12 months, US GDP growth will be slower than it is currently, which will force the Fed to follow the path of a rate cut in the coming quarters.
All of this will allow the American economy to avoid recession in the next 12 months, estimate 52% of the executives surveyed in September. And this is particularly important if we take into account the fact that The US recession is currently the main concern of managerswith 40% of respondents highlighting it as the major danger now threatening the markets.
Nearly 80% of respondents believe there will be no hard landing for the US economy next year, although, yes, the outlook for China is deteriorating, with the most pessimistic reading ever seen for the Asian country’s GDP growth since the question in this regard was first included in November 2021.
