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BofA Survey: Fund Managers Expect Stock Market Crash

Mohit Oberoi, CFA - Author

Sep. 4 2020, Updated 6:54 a.m. ET

  • Every month, BofA (Bank of America) conducts a survey of over 200 fund managers. The May survey revealed that most fund managers see the spike in US stock markets as a “bear market rally.”
  • Most fund managers don’t see a V-shaped economic recovery from the crisis.
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BofA fund manager survey

Every month, BofA conducts a survey of fund managers. Previously, the survey was known as the “BAML (Bank of America Merrill Lynch) fund manager survey.” The May BofA fund manager survey revealed that 68% of the respondents see the rally in US stock markets as a “bear market rally.” Notably, US stock markets have bounced back sharply from their March lows. Most asset managers, including David Tepper and Jeffrey Gundlach, aren’t convinced that the rally is backed by fundamentals. As a result, they expect US stock markets to crash.

US stock market crash

According to the BofA survey, fund managers see the possibility of markets going higher as a “pain trade.” A pain trade occurs when investors are caught off guard. In the current scenario, most investors expect US stock markets to crash. They have positioned their portfolios accordingly.

The BofA survey also showed that fund managers hold 5.7% of their portfolios in cash. The cash levels have come down from 5.9% in the previous month. However, the cash levels are 100 basis points above the ten-year average. Some investors might see higher cash holdings as a contrarian buy sign. Previously, a UBS survey of HNI investors also revealed that rich investors have been sitting on cash and expecting US stock markets to fall.

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BofA fund manager survey: Biggest tail risks

Overall, COVID-19 has taken a toll on the US economy. The BofA fund manager survey showed that only 10% of the respondents see a V-shaped recovery. Meanwhile, 75% of fund managers expect the shape of the recovery to be U or W shaped. Among the surveyed fund managers, 52% see a second wave of infections in major economies as the biggest tail risk. However, 15% see a structural increase in unemployment as the biggest tail risk, while 11% see the break up of the European Union as the biggest tail risk.

Most crowded trades

The May BofA survey showed that US tech and growth stocks are the most crowded trade. Notably, the Nasdaq Composite Index (NASDAQ:QQQ) is positive for the year. Stocks like Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) hit an all-time high despite the crash in US stock markets.

According to the May BofA survey, fund managers increased their equity exposure by 10%. In April, the exposure hit the lowest level since 2009. A net 23% of investors expect value stocks to outperform growth stocks. The ratio is the lowest since December 2007. The BofA bull and bear indicator are still at zero. Some see this as a contrarian buy sign.

BofA fund manager survey: Structural changes

Meanwhile, 68% of the respondents in the BofA May fund manager survey see supply chain reshoring as a structural shift in a post COVID-19 world. Under pressure from governments and consumer groups, some companies might shift their production from China. Also, 44% of fund managers see rising protectionism, while 42% see higher taxation in a post COVID-19 world. Globally, fiscal deficits have ballooned due to the stimulus. Governments will have to find ways to revert to more prudent fiscal measures.


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