...belief is powerful and you know that. That means we want to be on the right side of the trade and steer clear of a prospective stampede.
Full bull: global fundies’ three top trades for 2021
Fund managers around the world are betting big on a vaccine sparking an economic resurgence. But investors should ponder two counterpoints.
Nov 19, 2020 – 10.09am
Forget those terrifying stories you’re hearing about intensive care unit beds running out in some parts of North America and Europe. Ignore the fact that Donald Trump still hasn’t conceded. Don’t worry about the simmering tensions between China and Australia.
For the world’s fund managers, it’s time to go long or go home.
The Bank of America’s monthly survey of more than 200 global fund managers with $784 billion worth of assets under management has recorded its most bullish reading for 2020, with the survey’s indicator for GDP expectations in the year ahead reaching a 20-year high.
Fund managers appear to see a vaccine as a silver bullet for global growth. David Rowe
While a second wave of COVID-19 sweeping the global remains the top tail risk for those surveyed, fund managers have pulled forward their expectations for a credible vaccine to be announced from next February to next January, and are piling into trades that will benefit from the reopening of economies.
The survey suggests the Great Rotation many have predicted away from growth (and particularly tech stocks) is already underway, with fund managers cutting cash holdings to 15-year lows to pile into emerging markets, bank and value stocks.
Asked to name their favourite trades heading into 2021, a top three emerged that underscored the investors’ belief in the reopening theme: long emerging markets, long the S&P 500 and long oil.
Bank of America says the US election outcome and the announcement of promising results from vaccine trials are behind the switch in the psyche of investors.
While Chanticleer has been left shaking his head at reports that ICU beds are full in Switzerland and parts of the United States, investors appear to be looking past the pain the pandemic will cause during the Northern Hemisphere winter and seeing vaccines as a silver bullet that will instantly unleash economic growth.
Two-thirds of those surveyed believe the global economy is now in the early stages of a new growth phase, while just 19 per cent believe we’re still in a recession. A net total of 84 per cent of investors expect global profits to improve in 2021, the highest since March 2002.
And just as fund managers are taking more risks to bet on an economic recovery, they want companies to do the same.
While 47 per cent of investors still want to see companies use their cashflow to strengthen their balance sheets, the proportion of investors that want CEOs to increase capital expenditure – the key to making an economic recovery sustainable – surged a full 10 percentage points to 38 per cent.
What these fund managers are doing by jacking up their allocation to equities (those surveyed are net overweight 46 per cent, the highest since January 18) and telling firms to go for growth is exactly what central banks want them to do – take more risk.
But investors following the herd should ponder two things.
The first is the idea that a vaccine will reset the world to 2019. Overnight in the US, the chief executive of global travel giant Booking.com, Glenn Fogel, said while vaccines were exciting, he wasn’t budging from his prediction that a recovery would take years, not quarters.
He gave the example of corporate travel. “I just looked at myself … I’m not going to do as many long haul trips that I’m meeting just one person.”
There will be scars. Some of them, like Fogel’s corporate travel example, are easy to spot, but others will take months to emerge. Sector and stock selection is always critical, but even more so when sorting reopening winners and losers.
The second question is whether this reopening rotation has been too violent. Bank of America points out that cash in the portfolios of those surveyed fell from 4.4 per cent in October to 4.1 per cent, lower than it was before COVID-19 in January.
The bank’s rule is that when cash falls below 4 per cent, it’s time to sell.
“The reopening rotation can continue in Q4 but we say ‘sell the vaccine’ in coming weeks/months as we think we're close to ‘full bull’.”
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