Money managers boost risk, dump REITs to Lehman levels

Fund managers are becoming less bearish, buying more stocks and tech and increasingly confident that the U.S. economy will avoid a hard landing.

BofA’s August Fund Managers Survey of 247 panelists with $635B in assets under management showed sentiment the least bearish since February 2022. That’s based on a broad measure of cash positions, equity allocation and economic growth expectations.

Cash allocation fell to 4.8% from 5% That’s not only the lowest level to November 2021, but it also removes the BofA contrarian Buy Signal. The Sell Signal flashes when cash is below 4%.

Fund managers are still underweight stocks (NYSEARCA:SPY) (QQQ) (IWM) (MDY), but exposure rose 13 basis points to net 11% underweight, the lowest underweight since April 2022. It was also the biggest monthly rise since November.

Looking at the economy over the next 12 months a soft landing is still consensus with 65% expecting that outcome. Another 9% expect no landing and hard landing stayed at 20%.

Abandoning REITs

Fund managers are piling out of REITs (VNQ) (XLRE) (SCHH) (REET), with positioning showing a “capitulation” to Lehman/GFC levels, strategist Michael Hartnett wrote.

“REITs (are) most fascinating to watch,” Hartnett added. If there is “no recession, FMS says go max long, but if REITs can’t recover with Lehmanlike positioning, then recession could be just around the corner.”

Allocation to tech stocks (QQQ) (XLK) (XLC) (XLY) (VGT) (IYW) rose to 19% overweight from 8%.

Bond (TBT) (TLT) (SHY) (IEF) (HYG) (JNK) (LQD) allocation edged up 2 bps to 5%.

“Investors have been OW bonds for 8 out of 9 months in 2023, after a 14-year UW streak which ended in 2022,” Hartnett said.

He highlighted two current contrarian trades:

• Risk-on if you think the S&P (SP500) (IVV) (VOO) is heading to 4,800 = long REITs and short bonds
• Risk-off if you think the S&P heads to 4,200 (the BofA view) = long Utilities (XLU) and short Tech

Tail risks and crowds

Fund managers still consider long Big Tech (60%) to be the most crowded trade, despite boosting tech exposure.

Following that, 13% said short China equities (MCHI), with 6% saying long Japan equities (EWJ) and 5% saying short U.S. dollar (DXY).

For biggest tail risk, 45% said high inflation keeping central banks hawkish, still at the top from July. Worsening geopolitics got 14%, tied with a credit crunch and recession. A systemic credit event followed at 12%, with and AI/tech bubble at 10%.