Sensex peak cannot hide the waning confidence of global investors

The Sensex rose nearly 300 points to touch 56,000 for the first time on Wednesday. (Photo: Mint)
The Sensex rose nearly 300 points to touch 56,000 for the first time on Wednesday. (Photo: Mint)

Summary

  • Global investors have taken a U-turn from being high risk takers to being risk averse
  • Expectations for global growth have been cut to a net 27%, the lowest since April 2020

The Sensex scaled an all-time high of 56,118 intraday on Wednesday, driven by a catch-up rally in large-cap stocks with broader markets remaining in the consolidation zone.

However, this scaling of a new peak was short-lived as investors chose to book profits, a sign that there is little confidence in rallies these days. Global fund managers are running low on confidence and risk appetite, according to a survey of fund managers.

Global investors have, in just a few months, taken a U-turn from being high risk takers to being risk averse. The net percentage of investors taking higher than normal risk fell from a peak of 25% in February to 3% in August, the latest global fund managers’ survey by BofA Securities showed.

 

Potential dampeners
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Potential dampeners

There are several reasons for this. “Increased risk aversion is spreading on equity markets against the backdrop of heightened fears that the recovery of the global economy could falter, virus mutations could destroy the successes achieved so far in the fight against the pandemic, or the situation in Afghanistan could lead to geopolitical tensions," analysts at Swiss-based research firm LGT said in a note on 18 August.

Growth and profit expectations have fallen sharply, according to the August survey. Expectations for global growth have been cut to a net 27%, the lowest since April 2020, and for profits to 41%, the lowest since July 2020. Though those surveyed by BofA do not foresee a recession, waning growth expectations do not bode well for equities, especially when the global liquidity support may soon be withdrawn.

Further, the survey showed that fund managers perceive emerging market risk because of China and monetary risk as a result of bond tapering as the biggest threats to financial market stability. For global fund managers, inflation remains the top tail risk facing the markets followed by taper tantrum, covid-19 delta variant and asset bubbles.

The survey was conducted days before the geopolitical situation got out of hand in Afghanistan. Thus, market analysts caution that though global equities have largely shrugged off developments there, investors should brace for a knee-jerk reaction in the markets in case of a further deterioration in Afghanistan.

Little wonder then that global fund managers have been slightly more defensive in August with an increase in exposure to sectors such as healthcare, insurance, utilities and cash. Cash allocation increased to a net 13% overweight in August, the highest since October 2020.

However, fund managers have modestly trimmed their exposure to materials, commodities, emerging markets and energy.

“Political developments in Afghanistan could well add to the ongoing deterioration of the global risk environment because of covid and the re-rating of Asia’s growth outlook," Francesco Pesole, forex strategist at US-based ING, said in a note to clients.

Asia may continue to see more re-rating of growth expectations as low vaccination rates compared to Western economies raise the risk of tight containment measures, he said. “It is one reason why the safe-haven dollar may find fresh support in a week where the Federal Open Market Committee minutes could continue to fuel the US Federal Reserve’s hawkish expectations," he said.

As much as 84% of fund managers expect the Fed to signal taper by the year-end. The timing of the first rate hike has been pushed back into 2023, according to the BofA survey. The release of the minutes of the Fed’s latest policy meeting is due on 18 August.

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