Wall Street's money managers expect US stocks to keep rallying through the new year and bonds, gold and commodities to slump. But should you bet with them, or against them?
What does 2014 hold for financial markets? The world's biggest money managers are making some bold bets for the New Year, according to a new survey.
The big-money crowd is gambling that stock markets will keep soaring in 2014, that the U.S. dollar will rise, and that bonds, commodities and gold will continue to slump, according to the latest survey by Bank of America Merrill Lynch, which conducts perhaps the most authoritative survey of world money managers.
A net 54 percent of these asset managers remain "overweight" stocks in their portfolios, as they bet that markets will keep booming even following a thumping performance this year.
Meanwhile, a remarkable 64 percent remain underweight bonds, despite this year's sharp fall in prices and rise in yields, which ought to make bonds more attractive. Fears predominate that as the global economy continues to recover from the long economic slump and central banks scale back their support for the bond market, long-term interest rates will rise further and bond prices will fall.
A net 31 percent also enter 2014 underweight commodities, one of the most bearish readings on the asset class that the survey has found since it began asking about the asset class in 2006.
Money managers also remain bearish about gold, even though it has tumbled sharply in price this year, which ought, again, to make it relatively more attractive. On the contrary, the overwhelming majority of money managers told the survey that they believe the U.S. dollar is undervalued.
The survey gets even more interesting when you get down into the details. Money managers are huge bulls on technology stocks, despite a huge rally this year which has lifted the Nasdaq Composite Index ($COMPX) about a third, breaking 4,000 for the first time since the dotcom crash early last decade.
"Global tech is the most popular sector among investors by far," reports Bank of America Merrill Lynch, adding that among those polled, a net 48 percent were overweight technology stocks in their portfolios. It is the second-highest reading in nearly a decade's data.
Money managers are also betting that bank stocks will continue to rally as the global economy gets stronger.
Among the regions, money managers are huge bulls on Japan, where the net overweight is at near-record levels, and strongly bullish of U.S. and European stock markets as well. On the other hand, they are bearish about emerging markets, with a net 10 percent underweight the region. Brazilian stocks are especially unpopular, according to the survey.
Maybe I am excessively cynical, but the most interesting aspect of these surveys is how often money managers, in aggregate, turn out to be wrong. It's not always the case, but it frequently is: The assets they hate the most often turn out to do the best, and those they like the most often turn out to do badly.
One case in point: Last year in this very same survey, these managers were collectively very bearish on Japanese stocks. But for the year to date, Japan's Nikkei 225 stock index is up more than 45 percent, making it one of 2013's biggest success stories.
There is more than irony involved in this. These money managers move the markets: Bank of America Merrill Lynch polled 237 people who, between them, manage $655 billion worth of investments. And so if they all love a particular stock or asset class, they have already driven the price higher with their investments. The reverse is true for anything they hate.
Adding to the phenomenon is the managers' homogeneity. They all tend to read the same analyses. Their number-crunchers and asset allocators were all trained in the same business schools and rely on the same data and analytical techniques. As a result, they often think the same things.
So if the available numbers would lead conventional analysis to suggest, that say, frozen concentrated orange juice futures are going down, then almost all of these people will reach that conclusion. They will all pull their money out of FCOJ, and the price will collapse. But at that point the price may fall too far, and reflect even more pessimism than is justified.
The man who oversees the survey, Bank of America Merrill Lynch investment strategist Michael Hartnett, is well aware of these implications. He points out that contrarian investors will bet against the big-money crowd, especially when it makes really big bets on one direction.
If you're a contrarian, here are the bets to make for 2014. Scale back your exposure to U.S. and European stocks. Slash your holdings of Japanese stocks, technology stocks and banks to the bare minimum. Meanwhile, raise your bets on emerging markets (especially Brazil) and commodity and natural resource stocks. And hold plenty of bonds, and a little gold.
You pays your money and you takes your chances, as they say.
