Investors are eagerly anticipating the U.S. Federal Reserve’s updated economic projections expected out Wednesday.
Inflation is at the forefront of many investors minds at the moment, but the latest global hedge fund manager survey from Bank of America suggests fund managers aren’t particularly concerned about inflation.
Inflation Concerns: The Consumer Price Index climbed 5% in May, its highest growth since 2008. However, the Fed has said it expects high inflation levels in 2021 to be “transitory” as the economy opens up to full capacity.
Some investors are skeptical that recent inflation levels are transitory, but 72% of fund managers surveyed agreed that the current inflationary situation is only temporary. In fact, 68% of managers surveyed said it should be smooth sailing for the economy in the next couple of years and don’t expect another recession until 2024 at the earliest.
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But just because inflation is not a concern doesn’t mean fund managers aren’t expecting action from the Fed in the near term. About 63% of managers surveyed said they expect the Fed to signal a tapering of its $120 billion in monthly bond purchases in August or September.
Current Allocations: Cash levels among fund managers have dropped from 4.1% to 3.9% in the past month, and 57% of managers surveyed said any near-term correction in the stock market will ultimately be less than a 10% pullback.
Allocation to bonds is currently at a three-year low, while stock allocations are at year-to-date highs.
Bank of America found long commodities has also overtaken long Bitcoin (CRYPTO: $BTC) as the trade fund managers consider to be the “most crowded” at the moment.
Despite a belief that the commodity trade is crowded, it is also the most aggressive overweight allocation among fund managers relative to historical levels.
Fund managers are also overweight materials and banks and underweight bonds and utilities.
Benzinga’s Take: To mimic fund managers’ current allocations, consider buying the Invesco Optimum Yld Dvsfd Cmd Str No K-1 ETF PDBC, the Materials Select Sector SPDR Fund XLB and the SPDR S&P Bank ETF KBE and selling the iShares Core US Aggregate Bond ETF AGG.
Investors who want to take the contrarian approach and bet against hedge funds should take the opposite side of that trade.
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