FREE WHELAN: Global funds just poured cash into commodities at the highest rate… ever. Here’s why that’s important
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In this Stockhead series, investment manager James Whelan from VFS Group offers his insights on the key investment themes and trends in domestic and global markets. From macro musings to the metaverse and everything in between, Whelan offers his distilled thoughts on the hot topic of the day, week, month or year, from the point of view of a professional money manager.
I want to discuss the latest BofA (Bank of America) global fund manager survey, and what it tells us about the post-pandemic markets outlook.
But first, allow me a quick anecdote.
The statute of limitations is well clear so I’m able to talk about one of my first jobs pulling beers at my small town RSL.
I loved it and could pull a perfect Carlton Draught then and can still pull a perfect one now.
I learnt there that I was a good reader not only of people (who’s drunk, angry, sad) but also of machines.
I was reprimanded once for telling someone I thought machine 17 in the pokies area looked OK for a few dollars and they pulled out two grand.
Apparently we’re not meant to read’ the machines (that was a fun day on the job).
But one of the most frustrating parts of the job (and the most relevant to what I do now) was on Free Jukebox Saturday Night (FJSN).
Lacking the advanced tech of some of the fancier places, FJSN consisted of me handing a sack of dollar coins from the till to a regular patron, and reminding them: “Do not push the POPULAR button unless you want to hear Love Shack by the B52s”.
The reason I came to know Love Shack intimately (probably too intimately) is also what sparked my interest in machine learning and algorithms.
On what I assume was the first day of the old Juke Box’s history, the first song that (probably) played was, yep — Love Shack by the B52s.
Then someone (probably) pushed the ‘POPULAR’ button which plays the most played songs.
Love Shack would now be one of them. And because it was being played again, that would add to its total number played, and so it would thereby become even more popular.
Love Shack begets more Love Shack.
Now think about what we saw in the market for the last two years.
Tech stocks saw historic inflows and popularity, which beget more inflows.
And now, the reckoning is here.
So we need to unwind two years of global funds (both passive and active) all doing the metaphorical pushing of the ‘POPULAR’ button and letting Love Shack by the bleeping B52s play again.
Right now we’re at an interesting point in the tale, where family office allocators all over the world are having frank discussions about some of these high beta funds they’re in.
The call for redemptions comes after that and so selling begets selling, adding to volatility.
Volatility causes some ETFs to reduce exposure which begets more selling.
Imagine a Labrador chasing its tail down the stairs to the tune of Love Shack.”
We saw last week the BofA Fund Manager Survey (FMS) drop for January.
I like the BofA FMS because it’s US$1.2tn AUM (assets under management) worth of backward and forward-looking fund manager sentiment.
Finding out this week that funds were their least bullish on tech (a 20% reversal month-on-month) and most bullish on banks (highest number since October 2017 and near an all-time high) won’t surprise anyone.
The move from Growth to Value has been telegraphed loudly and proudly with the interest rate rises required this year to stem inflation.
Positioning is taking place and will take place.
In the current bout of market volatility, I prefer to read into the FMS to see where positioning is lined up.
That way, when the dust settles on Love Shack being unwound from the market, I can assess which sectors and themes will receive the love.
We mentioned banks, but also of note is the fact that the number of fundies who think the yield curve will steepen has fallen to the lowest number since December 2018.
That’s not great for banks, who borrow short and lend long.
Banks make up a big portion of the Value narrative, comprising 22.5% of the Vanguard Global Value ETF for example.
If you’re into Value (like me) then there’s some risks in that.
What about commodities? Well, here’s a great stat: The highest ever allocation to commodities was just recorded with a 12% increase month on month.
That goes back to 2006 and it’s significant. For a colossal weight of money to move into a sector at such a rate is telling and should not be disregarded.
The FMS showed that funds are (or at least were, in January) still bullish on equities, with a strong lean towards Europe.
That trend adds weight to my thesis that this isn’t a market-wide calamity, but more like a reallocation.
Cyclicals are popular too, so have a good look there as a great place to play rope-a-dope from the body blows that keep coming.
Lastly, I looked at how fund managers responded when asked what the ‘Biggest Tail Risk’ is for 2022.
It’s still the Fed.
Tighter monetary policy is on the cards folks, and a COVID-19 resurgence has fallen further down the list of concerns.
Late last year there was a small crowd of us yelling that the jitters in markets weren’t Omicron; more that the Fed was failing to grasp inflation.
The ‘Most Crowded Trade’ in the BofA survey remains US Tech. In other words, that’s the trade where fundies think too many people are still allocated.
I can’t spell this out any more; there’s more pain to come in areas of tech that were popular when they were popular because they were popular.
Now the bartender is getting his way, and Love Shack is getting ripped out of the Juke Box.
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