The world’s top institutional investors are at their most bullish on equities in two years as global growth expectations improve, driving further funds into the Mega Techs, such as Nvidia Corp NVDA and Microsoft Corp MSFT.
For the first time since April 2022, investors are not predicting a recession, with two-thirds of global investors expecting a soft landing for the economy, according to Bank of America’s February global fund manager survey.
“Expectations for strong macro and no recession keep investors in the soft landing camp at 65%, with hard landing probability fading to just 11%,” said lead analyst Michael Hartnett, noting also that those managers now expecting “no landing,” or continued growth trajectory, rose to 19% in February, up from 7% in January.
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Long Mag7 Stocks
Investors have increased their allocation to U.S. stocks to the highest level since November 2021 and to the technology sector to the highest since August 2020, reducing their investments in cash, commodities, emerging markets, as well as defensive and energy stocks.
The Energy Select Sector SPDR Fund XLE an exchange traded fund that tracks the oil majors, is up just 0.5% in 2024. By comparison, the Invesco QQQ Trust QQQ which includes all the Magnificent Seven stocks, is up 6.3%.
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Despite the stellar share price gains for this group, which also includes Amazon.com Inc AMZN and Meta Platforms Inc META, global investors remained overwhelmingly long — meaning they expect further gains in 2024.
“Long Magnificent Seven continues to be the most crowded trade, with 61% of investors still committed,” the survey said.
The next most crowded trade was “short China equities” as foreign investors continued to pull funds from the country’s beleaguered stock markets.
U.S. Commercial Real Estate Danger
While global investors were upbeat on the economy, their risk assessment strategies could be compromised by a number of macroeconomic and non-macro events, with 27% seeing the biggest tail risk as higher inflation, while 24% said geopolitics and 16% said a systemic credit event.
“U.S. commercial real estate takes the number one spot for the most likely source of a systemic credit event in the February survey,” Hartnett said. In the January survey, it was the U.S. shadow banking sector.
Last week, Treasury Secretary Janet Yellen voiced concern about stresses in the commercial real estate sector as the industry grapples with high interest rates and falling office occupancy.
According to data from Apollo Academy, the price per square foot of office space in the U.S. is down 40% from its peak in the fourth quarter of 2021.
Of particular concern is the potential knock-on effect on the regional banking sector, which holds more than two-thirds of outstanding commercial real estate loans, according to Apollo.
The SPDR S&P Regional Banking ETF KRE an exchange trade fund which tracks the sub sector of the S&P 500, is down nearly 7% since the start of the year.
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