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Bad news is good news again, as far as investors are concerned. The latest BofA fund manager survey reveals a slump in macroeconomic optimism is helping propel equity allocations higher.
So while global growth and global profit expectations have fallen back to their lowest levels since May 2020, risk-asset allocations continue to rise. We discussed this ‘there is no alternative’ positioning yesterday, but this is as much a ‘Goldilocks’ environment as anything else. A weaker growth outlook means rates stay lower for longer, and risk assets continue to prosper.
This all-too-familiar backdrop doesn’t spell good news for all shares. Positioning in small-cap or value names is back to October 2020 lows, according to the survey. But allocators aren’t hunkering down entirely: some cyclical plays, like materials, continue to find favour even as a retreat from emerging markets takes place.
And right on cue, this macro view was reinforced by today’s US inflation print. Headline price growth came in lower than expected for the first time since October, with core inflation also failing to match expectations.
Economic concerns were less evident in the European version of BofA’s survey. But here too there are mixed signals to ponder. The rotation into European equities may feel relatively new, but almost 60 per cent of respondents now predict there will be 5 per cent more upside, max, for the rest of the year.
At the same time, most respondents said the biggest risk to their portfolio is reducing equity exposure too early. Those competing sentiments emphasise the difficulties facing allocators in the months ahead.
That renewed appetite for all things Europe doesn’t mean a new broom in the world of fund sales.
Figures from Morningstar show the most popular European equity fund last month – indeed the most popular retail fund from any sector – was that run by growth stalwarts Baillie Gifford.
The strategy took in an estimated £217m in net flows in August, narrowly beating out perennial favourite Fundsmith Equity. There were only a handful of other winners on the continent, and they’re pretty much as you’d expect: an iShares tracker, Premier Miton European Opps, and BlackRock European Dynamic.
Otherwise, August's top ten funds from all asset classes has a familiar look to it: it included Vanguard US Equity Index, Ninety One Global Environment and Liontrust Sustainable Future Global Growth.
It wasn’t entirely business as usual. Baillie Gifford did become a modest victim of the retreat from Chinese equities, its China fund shedding an estimated £60m on a net basis.
But not all emerging market or Asian equity strategies suffered in kind. The Edinburgh fund house’s Pacific fund has largely avoided the troublesome areas of the Chinese market – as has JPM Emerging Markets, as we mentioned the other week. Both were rewarded with sizeable net flows last month.
That suggests investors are still keen to tap the emerging market story – just so long as they can do so in a way that avoids the pitfalls of a more interventionist Beijing. That’s easier said than done, but for now there are some funds managing to make a success of things.
From stagnation to inflation
If inflationary pressures do reduce, that would help limit the worries about stagflation that have resurfaced again this summer. But things are unlikely to come to a swift resolution on that front, as Mohamed El-Erian writes today.
Supply shortages are likely to persist for some time to come, and whether or not you agree that there are labour shortages on top of that, these delays and gaps will present a challenge to the global economy.
Goldilocks, or stagnation, is one thing – and the kind of stagnation seen over the past decade hasn’t hurt risk assets in any meaningful way. It’s doubtful whether stagflation, were it to occur, would be quite as pain-free for investors.