Putin calls the shots, but only in the short term; How are institutional investors positioning themselves?
Chart of the week
A monthly survey by Bank of America shows what concerns U.S. institutional investors have.
Why it matters
The stock market goes up when more investors buy stocks than sell, and it goes down when more sell than buy. That's why it makes sense to keep a closer eye on the biggest investors. If you understand what they are doing, you understand the direction the market is going.
80% of all financial assets are held by institutional investors (10% by retail investors and 10% by wealthy individual investors/families).
Every month Bank of America surveys institutional investors about their investment policies. The latest survey shows that most investors are concerned about central bank policy and high inflation. Negative or positive developments in the two areas will affect the markets the most in the long term. The Ukraine crisis is only in 5th place here.
Putin calls the shots, but only in the short term
The stock market this week was marked with uncertainties. Will Putin invade Ukraine or not? We still think he won't, but by now the situation is so tense that a small spark can cause an explosion.
There are two good stock market rules that can be applied here that say it all:
- Buy when the guns are popping: The worst thing for the stock markets is uncertainty. Will there be a war or not? Willing investors wait to buy and fearful investors sell. The stock market runs slowly downward. As soon as things are clear, the first buyers pounce. Historically, this has always been a good short-term buying moment.
- Political stock markets have short legs: The most important thing for the stock markets is how companies perform and what profits they make. The second most important thing is how companies perform and what profits they make. And the third most important thing is the policy of the central banks. Policies can affect the markets in the short term, for example, when the price of oil skyrockets, but in the long term, the effects are not relevant for the long-term performance of companies.
The graphs of the investment director of Fidelity, Julian Timmer are always very good, but not always easy to understand. The chart says that if the price/earnings ratio of stocks, the valuation of the stock market, is dragged down by a tighter interest rate policy from the Federal Reserve, then it must be corporate earnings growth that is carrying the stock market and keeping the bull market alive.
So far, 80% of all companies have reported their final year earnings for 2021 and 70% have exceeded expectations. That's more than the long-term average.
Combine the two stock market rules above with the solid earnings report, and it suggests that if a belligerent confrontation in Ukraine is going on, this is a good time to get in.
How are institutional investors positioning themselves?
Based on the monthly survey of institutional investors mentioned above, some other interesting conclusions can be drawn.
Institutional investors were asked whether they believe central banks that say inflation is only temporarily high, or whether they expect permanently higher inflation. Compared to last month, fears that inflation could remain high have increased.
The chart shows that institutional investors have sold assets out of concern and are holding a higher cash balance. Where will the money go when they start investing again?
Institutional investors were asked where they see the biggest bubble and where they would stop investing. The biggest change from the previous month is the assessment of the technology sector and in commodity prices. It can therefore be assumed that new investments could now come back into these two sectors and that there will be a (short-term) countermovement to the upside.
Here, investors were asked whether they were more likely to back value or growth stocks. The number of investors who backed value has reached a new all-time high. All of them are already invested in value stocks. This also suggests a (short-term) countermovement from the sharply lower growth area.
However, these are short-term movements of 1-2 months. In the long term, we still believe in substance stocks:
Over the past 10 years, growth stocks have performed much better than substance stocks. This was mainly due to the central banks' expansionary monetary policy. In times when central banks pursue a restrictive monetary policy, value stocks generally perform better. We therefore do not allow short-term fluctuations to distract us from our long-term investment policy and remain value overweighted.
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