The end of the year is almost in sight. Pumpkin spice lattes are back and supermarkets are starting to plaster images of mince pies on their apps. (Too soon, in my view.)
At this point in the calendar, fund managers have one key task: Don’t do anything stupid. The largesse of central banks and governments has propped up their returns rather nicely in 2021, and unless they break that golden rule with an ill-fated blowout bet, most are on track to post respectable figures for the full year.
“It feels like doing something stupid now would be particularly punishing,” said David Riley, chief investment strategist at BlueBay Asset Management. Ideally, you try not to do it at all, as he pointed out, but doing it now, with the year getting old and risky markets priced for perfection, “would be much less forgiving”.
That may help explain a big shift in sentiment. Suddenly, investors have grown much more cautious.
Bank of America’s latest monthly survey of fund managers — a key gauge of the market mood — showed this week that optimism was “tanking”. Out of the 232 fund managers surveyed this month, with a combined $800bn in assets, just a small cohort — a net 13 per cent — are now expecting a stronger global economy.
A pullback in almost universal optimism from this spring, when we started to emerge blinking from lockdowns, is inevitable. But a month ago, the proportion of optimists was twice that size. Investors have not been this downbeat since April 2020.
Similarly, expectations for corporate profits have fallen hard. Just 12 per cent think they will improve, down from 41 per cent in the previous month and the lowest since May last year.
China is really helping to stir nerves here. Perhaps counter-intuitively, that is not because of the debt stress that is hitting the country’s property sector. Rightly or wrongly, global investors believe that the crisis gripping developer Evergrande is akin to a controlled implosion, with few if any domino-toppling repercussions for overseas banks.
If anything, analysts suspect the Evergrande meltdown may encourage China’s central bank to reinstate more of its coronavirus-era monetary support. The coming weeks will no doubt test that upbeat view.
Instead, the main concern is that we have passed the point of peak growth, particularly in China, where retail sales this week proved much more feeble than economists had predicted and industrial production has also proved surprisingly flimsy. Investors are wary over which pocket of markets may attract Beijing’s ire next, after its swipes at the education, tech and gaming sectors.
But it is not only China. Citigroup’s global economic surprise index — a measure of the degree to which economic data releases exceed or disappoint economists’ expectations — has plunged to minus 16 points, down from about plus 90 points as recently as June. In other words, despite the growing wave of pessimism, analysts and economists failed to anticipate how badly the economy would perform.
Globally, the Delta coronavirus variant is not magically disappearing. And arguably the scariest markets risk of the year — inflation — is proving to be alarmingly sticky.
The real curiosity, though, is that while optimism is plunging, markets very clearly are not. The upward momentum has waned, for sure. Despite the darker mood, still a net half of the investors in the BofA survey are overweight equities. That is down from a peak of 62 per cent earlier this year but it still represents a rosy asset allocation.
Normally, the bank says, growth expectations are a decent indication of where investors will put their money to work next, but this time round, equity allocation is “lagging”. Allocations to cash — a bolt-hole in times of stress — are rising, but they are still low by historical standards, and “there is no appetite” to seek safety in the government bond market.
BlueBay’s Riley is among those who are growing more nervous, and more reluctant to take on heroic new risky bets before the end of the year, but he is not willing to bet that the party is over. “It’s not that we think there will be a big correction. It’s just that you are not getting paid to take on a lot of risk,” especially in corporate debt, he said. “With valuations where they are, there’s not much upside.”
Instead, “we have added some downside protection. We are dialling down risk.” If a big shock does arrive, “we would be buyers”, he said.
Yet again, the resilience of markets demonstrates the power of Tina — There Is No Alternative to investing in risky assets while government bond yields are so depressed. As Goldman Sachs pointed out this week, the Tina mantra is a powerful force. Money just keeps on pushing into equity funds. “We think that low yields and Tina can still drive further equity inflows and, given high cash balances, corporates can further support equity demand from here,” the bank said.
That leaves a lot of investors trapped, according to Cole Smead, president of Smead Capital Management. “There’s a lot of people holding stocks today that don’t really like stocks, but they just hate bonds,” he said. Tina can be tough.
Unhedged — Markets, finance and strong opinion
Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday