Pain trade is still up for stocks

Sentiment has improved but investors remain wary, according to Bank of America’s latest monthly fund manager survey, with two-thirds saying the strong advance over the last four months is just a bear market rally.

Pessimism is less widespread on various fronts. There has been a sharp fall in the percentage of investors predicting a recession. Global growth expectations are the least pessimistic in a year. And cash allocations have fallen to levels unseen since before the start of the Russia-Ukraine war.

Nevertheless, investors remain decidedly cautious. Cash allocations may have fallen, but they remain well above historical averages. Similarly, most investors remain underweight stocks, with equity allocations over two standard deviations below long-term norms. Most telling, perhaps, is the fact that only 23 per cent think we are in a new bull market.

The only hint of exuberance is towards emerging markets: over the last three months, the percentage of investors overweighting emerging markets has soared by 51 percentage points, the biggest-three month rise on record. Overall, however, there is “no red light for risk assets”, says BofA.

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The survey is best viewed as a contrarian indicator, with excessively bullish sentiment indicative of a frothy, risky market. Right now, the mood among investors is “nowhere near optimistic enough” to say positioning is a sell catalyst, says BofA. The “pain trade is still up”.