Bank of America (BofA) recently reported that a global survey revealed optimism around the Chinese economy, with 48% of global fund managers expecting a stronger economy in the next 12 months following China's stimulus measures. This represents the highest level of positive sentiment since April 2023, overturning last month's survey results.
The survey also highlighted that "going long on Chinese stocks" has become the third most popular trade among investors, with 14% expressing confidence. The top two trades were investing in U.S. tech giants, favored by 43% of investors, and investing in gold, with 17% backing this move.
In the wake of China's stimulus policy, emerging market stocks and commodities are seen as significant beneficiaries, while government bonds and Japanese stocks are perceived as having less potential for gains. However, BofA cautioned that global stock markets have triggered a sell signal for the first time since February 2021, driven by a drop in cash allocation ratios from 4.2% to 3.9%, signaling investor optimism.
Strategist Michael Hartnett explained that a cash allocation ratio below 4% typically signals a sell-off, as it occurs when investors actively engage in the stock market with lower cash levels. Historically, such sell signals lead to market adjustments, with global stock returns showing a negative trend in the short term. Since 2011, there have been 11 instances where sell signals preceded market corrections, resulting in an average return of -2.5% one month after, and -0.8% three months after the signal.
The recent signal comes as global stock markets approach historic highs, amid investor optimism driven by anticipation of Federal Reserve rate cuts, Chinese stimulus, and expectations of a soft economic landing. Optimism surged to its highest level since June 2020.
Investors surveyed appear confident in the global economy's resilience, with growth expectations experiencing their fifth-largest increase since 1994. The survey found 76% of institutional investors expect a "soft landing," where the economy maintains steady growth rather than experiencing a significant downturn, or "hard landing."
Despite the positive outlook, investors remain wary of geopolitical tensions, with concerns rising from 19% to 33% over the past month. Additional worries include inflation and potential economic recession.
The BofA survey, conducted between October 4 and 10, included responses from 195 fund managers overseeing assets totaling $5.03 trillion.
