Putin calls the shots, but only in the short term; How are institutional investors positioning themselves?

Chart of the Week

A monthly survey by the Bank of America shows what concerns American institutional investors have.

Why this matters

The stock market rises when more investors buy stocks than sell them, and it falls when more investors sell than buy. That is why it makes sense to take a closer look at the largest investors. If you understand what they are doing, you understand where the market is heading.

80% of all financial assets are held by institutional investors (10% by retail investors and 10% by wealthy individuals/families).

Every month, the Bank of America surveys institutional investors about their investment strategy. The latest survey shows that most investors are concerned about central bank policy and high inflation. Negative or positive developments in these two areas are expected to have the greatest long-term impact on the markets. The Ukraine crisis ranks only fifth in importance.

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Putin calls the shots, but only in the short term.

This week, the stock market was marked by uncertainty. Will Putin invade Ukraine or not? We still believe that he will not, but the situation has become so tense that even a small spark could trigger an explosion.

There are two good stock market rules that apply here and say it all:

• Buy when the cannons roar: The worst thing for the stock market is uncertainty. Will there be a war or not? Willing investors hold back on buying, while fearful investors sell. The market gradually drifts lower. As soon as the situation becomes clear, the first buyers step in. Historically, this has often been a good short-term buying opportunity.
  

• Political stock market moves are short-lived: The most important factor for stock market performance is how companies develop and the profits they generate. The second most important factor is how companies develop and the profits they generate. And the third most important factor is central bank policy. Politics can influence markets in the short term, for example if oil prices surge, but in the long run, political events are generally not relevant to the long-term development of companies.

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The charts from Jurrien Timmer, Fidelity’s Chief Investment Strategist, are always very good, though not always easy to understand. The chart suggests that if the price-to-earnings ratio of stocks — the valuation of the equity market — is pushed lower by tighter central bank interest rate policy, then corporate earnings growth must carry the stock market and keep the bull market alive.

So far, 80% of all companies have reported their full-year 2021 earnings, and 70% have exceeded expectations. That is above the long-term average.

Combining the two stock market rules mentioned above with the solid earnings reports suggests that if a military confrontation in Ukraine were to occur, it could present a good entry point for investors.

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How are institutional investors positioning themselves?

The monthly survey of institutional investors mentioned above also provides further interesting insights.

Institutional investors were asked whether they believe central banks, which say that inflation is only temporarily high, or whether they expect permanently higher inflation. Compared to last month, concerns that inflation could remain elevated for longer have increased.

The chart shows that institutional investors have sold assets out of concern and are holding higher cash reserves. Where will that money flow once they start investing again?

Institutional investors were asked where they see the biggest bubble and where they would no longer invest. The biggest change compared to the previous month is in the assessment of the technology sector and commodity prices. It can therefore be assumed that new investments may start flowing back into these two areas, potentially leading to a (short-term) rebound.

Here, investors were asked whether they prefer value stocks or growth stocks. The number of investors favoring value stocks has reached a new all-time high. Everyone is already invested in value stocks. This also suggests the possibility of a (short-term) rebound in the heavily beaten-down growth sector.

However, these are short-term movements lasting 1–2 months. In the long term, we still believe in value stocks:

Over the past 10 years, growth stocks have significantly outperformed value stocks. This was mainly due to the expansionary monetary policy of central banks. During periods when central banks pursue a restrictive monetary policy, value stocks generally tend to perform better. We therefore do not let short-term fluctuations distract us from our long-term investment strategy and remain overweight in value stocks.

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Disclaimer:

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The content in these blog posts is intended solely for general informational purposes and to help potential clients gain an understanding of how we work. It does not constitute recommendations to buy or sell assets and should not be considered investment advice. Marmot.Finance cannot assess whether or how the statements made align with your investment objectives and risk profile. If you make investment decisions based on this blog post, you do so entirely at your own risk and responsibility. Marmot.Finance cannot be held liable for any losses you may incur as a result of the information contained in this blog post. The products mentioned are not recommendations but are intended to illustrate how Marmot.Finance works and selects such products. Marmot.Finance is also completely independent and does not earn any form of compensation from product providers.

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