Bearish despite rally
As we saw in the previous part of this series, fund managers are rotating out of equities into bonds and cash. This typically bearish behavior despite the continuing equity rally could be because these investors are not convinced about the longevity and sustainability of this rally (DIA). In this article, we’ll discuss the reasons that could be responsible for such hesitation among investors.
Expectations of weak growth
Out of the investors surveyed, 46% expect global growth to weaken over the next 12 months. Last month, 60% of the surveyed investors were expecting weaker growth. That, however, is not a reason to cheer, as 55% of investors expect a secular stagnation in the next 12 months as compared to just 14% in January. Secular stagnation implies weakness in both growth and inflation (TIP) expectations.
Corporate leverage concerns
Another reason for investors’ bearishness could be their concern about corporate leverage. Last month was the first time since the financial crisis that corporate leverage has topped investors’ (SPY) (IVV) list of concerns with 48% of them believing that corporate balance sheets are overleveraged. This month, 46% are still concerned about corporate leverage.
The latest survey also showed that the percentage of investors that prefer companies to use cash to improve their balance sheets instead of increase their capex or return cash to shareholders was at a ten-year high. Leverage has taken on increased importance among investors since the Fed reversed its easing policy starting in December 2015. Rising interest rates (TLT) affect refinancing costs, and leveraged balance sheets become even riskier.