Investor Sentiment Has Rebounded to Pre-Liberation Day Levels, BofA Says

Investors think the future is looking brighter than it has in months, according to a recent Bank of America survey. 

The BofA Global Fund Manager Survey’s investor sentiment index rose to 3.3 in June, its highest reading since March, before President Donald Trump’s “Liberation Day” tariffs sparked fear of a global trade war. (Note, the survey was conducted between June 6 and 12, after the U.S.-China trade détente, but before the recent escalation of hostilities in the Middle East.) 

The fund managers surveyed by BofA reduced their cash levels to a three-month low while significantly upping their allocations to emerging market equities, as well as energy and bank stocks. They slightly increased their allocations to U.S. stocks, but remain net underweight. 

Investors are most overweight Eurozone stocks, which got a boost earlier this year from the announcement of fiscal stimulus in Germany, the bloc’s largest economy, and a pivot out of U.S. stocks in the wake of heightened trade uncertainty. When asked what they expected to be the best-performing asset class in the next five years, 54% of respondents said international stocks, compared with just 23% indicating U.S. stocks, signaling a major shift in expectations after more than a decade of U.S. outperformance. 

Nonetheless, investors think the outlook for the global economy has improved markedly in recent months. A net 36% of respondents said a global recession in the next year was unlikely; just two months ago, a net 42% said a recession was likely. The share of respondents saying they expect the global economy to achieve a soft landing in the next 12 months rose to 66% from 61% in May and 37% in April. 

Fund Managers Enthused About Company Finances

Granted, investors still aren’t entirely optimistic. A net 46% of global fund manager respondents are expecting a weaker economy in the next 12 months, and 75% of respondents expect the global economy to struggle with stagflation over the same period. 

The improved economic backdrop and a stronger-than-expected first-quarter earnings season have investors bullish on corporate finances. For the first time since the end of 2015, more respondents said company balance sheets are underleveraged than overleveraged. As such, when asked what they hoped executives would do with excess cash over the next 12 months, more said “return cash to shareholders” via dividends or buybacks than at any other point since July 2013. 

One asset for which the future isn’t looking so bright is the dollar. Investors have trimmed their exposure to the greenback to such an extent this year that as of June they’re the most underweight since January 2005. The U.S. Dollar Index (DXY) has declined more than 9% since the start of the year, putting it on track to notch its worst first half in more than two decades.

The dollar’s decline has coincided with the rise of the “Sell America” trade, which is effectively the shunning of U.S. assets by international investors unnerved by President Trump’s hostility toward the global financial order underpinned by the dollar.