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Investors rotate out of US equities, lagging risk assets play catch-up
While investors remain bullish on the US dollar and equities, they are bearish on just about everything else, Bank of America has found.
Bank of America’ (BofA) latest Fund Manager Survey (FMS), which surveyed 214 global panellists between 10 and 16 January, found that 41 per cent of investors believe that the US dollar will be the best performing currency in 2025.
And while institutional allocation to equities has dipped from the three-year high of net overweight 49 per cent overweight, having peaked in December, it remains high nonetheless, at a net 41 per cent.
On the other side of the coin, respondents became the most underweight in bonds since October 2022, at 20 per cent net underweight, and cash levels rose to 11 per cent underweight from 14 per cent underweight in December.
Meanwhile, FMS commodities allocations rose 6 per centage points to net 6 per cent underweight.
“But if January concerns over Trump tariffs and disorderly bonds [are] unfounded, then asset allocation stays risk-on,” BofA said.
Lagging risk assets are also playing catch-up, the bank added.
Namely, allocation to eurozone equities jumped a notable 26 percentage points to 1 per cent overweight, the largest monthly increase since February 2015.
“January saw a rotation out of US stocks (down to net 19 per cent overweight from December’s record net 36 per cent overweight) and into eurozone stocks,” BofA said.
When asked which developments would be seen as the most bullish for risk assets in 2025, 38 per cent said China’s growth acceleration, followed by rate cuts from the Federal Reserve (17 per cent) then AI productivity gains (16 per cent).
In the case for what would be seen as the most bearish for risk assets, respondents cited a “disorderly” rise in bond yields (36 per cent), Fed rate hikes (31 per cent) and global trade war (30 per cent).
In terms of what asset class is expected to perform the strongest this calendar year, more than a quarter (27 per cent) of investors are backing US equities despite the slight drop in their overweight exposure to the asset.
Global equities follow US equities, with 21 per cent of investors expecting their outperformance, while bitcoin occupied third place with 14 per cent.
BofA continued: “Our broadest measure of FMS sentiment, based on cash levels, equity allocation, global growth expectations, dipped from 7 to 6.1 in January, showing some of the December 2024 FMS ‘froth’ has been removed.”
The growth view
According to BofA, global growth expectations remained muted, falling to net -8 per cent from 7 per cent in December.
“Optimism fell for both the US and China,” the bank said.
However, 26 per cent of investors now expect a global economic “boom” – characterised by above-trend growth and above-trend inflation – in the next year, marking the strongest sentiment from investors since April 2022.
At the same time, inflation expectations have risen to the highest level since March 2022, with only 7 per cent of FMS investors expecting global consumer price index to be lower in 12 months’ time.
“As a result, expectations for rate cuts have become more tempered with net 59 per cent of investors expecting lower short-term rates, the lowest since July 2023.”
Moreover, the probability of a “soft landing” fell to 50 per cent from 60 per cent, from the perspective of investors. Notably, the probability of “no landing” rose to 38 per cent.
AUTHOR
Jessica Penny
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