Most fund managers across the world believe that equity markets have returned to a bull rally and there is more upside over the coming 12 months – and 18% have moved to a net overweight.

As technology begins to lose its lustre, the majority have begun to seek to ensure they continue to outperform by stock hunting, according to the latest monthly BoA Merrill Global Fund Manager Survey for early September, released on Wednesday Hong Kong time (September 16).

For the first time since February, more respondents said that the macroeconomic cycle had returned to an early growth phase (49%) instead of remaining mired in recession (37%). In addition, 84% predict that there will be global economic growth over the coming year, the highest level since 2003, while 40% said it would become “a lot stronger” – the highest level ever recorded.

That helped support the net 18% overweight equity allocation among respondents; up six percentage points from the previous month.

The participants do not believe this recovery is likely to be a snap-back, however; nearly two-thirds (61%) predicted an economic recovery would be U- or W-shaped, instead of a V.

After months of fund managers favouring technology, healthcare and macroeconomic stocks, they have begun to shift away – 80% called US long tech positions “the most crowded trade” of all time, according to the survey write-up. That said, despite both tech and pharmaceutical stocks showing 10 percentage point drops, they remain by far the most popular sectors (with 30% and 28% respective overweights).

Meanwhile, industrials have gained more appeal, moving up to the third-most sought-after sector (with a 17% overweight). On the other hand, utilities, energy and bank stocks respectively remained the most underweighted sectors.

Passive investing is also continuing to make ground. The survey noted that 25% of respondent assets under management are now passively invested, the highest amount on record.

LIMITED BOND UPSIDE

The next major fixed income catalyst for fund manager shifts isn’t likely to be the US presidential election but the successful release of a viable Covid-19 vaccine.

Bonds continue to be out of favour overall. While investors that are overweight in the asset class grew by three percentage points, all-told that still meant that 35% of respondents continue to underweight it.

There are signs, however, that investors believe that fixed income market dynamics could change. All-told, 41% believe that the release of a vaccine could cause interest rates to rise, while 37% say inflation was also a potential factor that could cause rate increases. They do not believe, though, that this will happen soon; less than a third (32%) said a vaccine would be announced before the end of the year.

One upshot of this is that rates look set to remain range-bound; only 11% of respondents said that 10-year US Treasury yields will trade outside a 50-100 basis point range by the end of the year. As of Tuesday close (September 15), 10-year US Treasury paper was yielding 68.2bp.

Of course, it is also possible that the pandemic could prove to be a major downside. Thirty percent of investors called a second wave of the pandemic a “top tail” risk, with the bursting of a tech bubble, the US election and a credit event being the next most worrying concerns.

Other notable trends included allocations to real estate dropping from a 1% overweight in July to a 4% underweight last month, largely as prime property continues to suffer the impact of company cost-cutting, layoffs and white-collar workers staying at home. In addition, the average allocation to commodities fell from 13% to 5% over the past two months, respectively.