Fund managers hold record low in cash as sentiment hits four-year high

By Jules Rimmer

Cash levels have never been lower and investor optimism has rarely been higher, Bank of America finds

Bank of America's trading rule says "sell" when cash levels fall below 4%. They are 3.3% at present.

Plummeting cash levels perfectly illustrate the extent of fund manager optimism at present.

Bank of America's global fund manager survey released Tuesday points to all-time low cash levels of just 3.3%, down from 3.7% in November. Such bullish positioning, notes the report's author Michael Hartnett, represents the biggest headwind for risk assets. Investors are all-in already.

FMS cash level drops to record low 3.3%

Nonetheless, although the cash level has triggered a technical sell signal according to Hartnett's trading rule, Bank of America's proprietary "Bull and Bear Indicator" is at 7.9, just below the 8% that would warrant a trading sell.

This decline in rainy-day reserves is the direct consequence of macro optimism reaching its highest level since Aug. 2021 at the peak of the post-pandemic bonanza. Among the 203 respondents to the survey, marshalling $569 billion in assets under management, stronger growth expectations for the global economy and the S&P 500 SPX were simply catching up with stock prices, Hartnett notes.

Global growth expectations most optimistic since Aug'21

Consensus now is either for a soft macro landing (57% of those polled) or no landing at all (37%) which ought not to be surprising since liquidity conditions are among the most plentiful since the global financial crisis of 2008.

However, considering the majority expects Kevin Hassett to be the next Fed chair - the poll was conducted before the recent shift in betting odds in favor of Kevin Warsh - the majority of fund managers expect higher bond yields going forward. Hassett is seen to be an advocate of much looser monetary policy and consequently three-quarters of fund managers reckon yield curves will steepen in the next year.

Fund managers were the most overweight stocks since last December and the most underweight bonds since the most recent inflation shock hit in the autumn of 2022. That inflation shock then coincided with a boom in commodity allocations, and the current optimism has seen fund managers go back to being as long commodities as they were then.

Sectoral preferences revealed by the survey were in favor of financials XLF and healthcare XLV with underweights in energy XLE, cash and staples XLP . No wonder then, the contrarian trades suggested by the data (rather than recommended by Hartnett himself) are to be long cash and bonds while short stocks and commodities.

Going long U.K. equities UK:UKX versus a short in emerging market equities EEM would also run very counter to the prevailing trends at present.

What might burst this confidence bubble? Well, concerns about AI overspending and hyperscaler capex feature prominently in investor mindsets as the No.1 tail risk and the most likely cause of a credit event.

The most crowded trades identified in the survey were overweights in the Mag 7 MAGS and gold (GC00) .

-Jules Rimmer

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