HomeMarket NewsThe Concerns of Fund Managers: Government Deficits and Corporate Leverage

The Concerns of Fund Managers: Government Deficits and Corporate Leverage

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When it comes to government spending, money managers are growing increasingly cautious of its impact on the market. According to the latest survey by Bank of America, a net 24% of the 295 panelists with $736B in assets under management believe that monetary policy is too restrictive, marking the highest level since November 2008. Additionally, 31% of the respondents feel that fiscal policy is too stimulative.

Government Debt Ceiling and Federal Government Shutdown

Douglas Rissing

This policy mix has been deemed as bearish for bonds and bullish for the U.S. dollar. Michael Hartnett, a strategist, states that this combination is β€œas bond bearish, U.S. dollar bullish β€˜as it gets.'”

In light of the 10-year Treasury yields reaching levels not seen since 2007, 50% of the surveyed fund managers believe that the rise in bond yields is driven by high government debt and deficits, while only 32% attribute it to strong nominal economic growth. Hartnett suggests that government deleveraging would have a positive impact.

But it’s not just government finances that are causing concern. Corporate balance sheets have become a worry as well. A whopping 53% of fund managers express the desire for improvement in corporate balance sheets, which is the highest level since May. They prioritize this over capital spending, which only 25% see as important, and returning cash to shareholders, which only 15% value.

It is interesting to note that a strong focus on balance sheet repair has historically been associated with elevated recession risk. In March 2009, 71% of FMS investors wanted to see companies reduce leverage, and in April 2020, this number increased to 79%. In October 2022, 60% of investors sought balance sheet repair.

Since September, fund managers have become more bearish, with cash levels rising from 4.9% to 5.3%. This triggers a buy signal in the BofA Global FMS Cash Rule. If we look back to 2011, following this buy signal would have resulted in S&P 500 returns of 2% in the two months after, 4% in the three months after, and 7% in the six months after.

When it comes to the biggest tail risks, high inflation, which keeps central banks hawkish, remains at the top of the list with 31%. Geopolitical tensions come second, but have risen to 23%, followed by concerns about a global recession or hard landing at 21%.

In terms of crowded trades, long positions in big tech stocks are still considered the most crowded, followed by short positions in Chinese equities and long positions in Japanese equities.

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