The positioning has started, the professionals are preparing for the big Trump trade

After a long time, inflation has fallen from the first place on the podium as the biggest threat to the capital markets. In the survey of fund managers by Bank of America, more people now see the deterioration of the geopolitical situation as a so-called “tail-risk” again, this is the first such month since January (“tail risk” is usually called a risk whose occurrence probability is low, but its effects are very they can be wide-ranging) It should be remembered that in January the view began to spread among investors that interest rates may remain high for longer than previously expected due to persistent inflation.

At the same time, the majority of the 242 specialists responsible for investing a total of 632 billion dollars remained moderately optimistic about the prospects of the world economy. Although the vast majority of them expect that the momentum of economic growth will moderate in the next 12-month period, the vast majority of them, 68 percent, believe that this slowdown will not mean a recession, but a slow recovery.

Once convinced that the fight against inflation is a done deal, fund managers can hardly wait for more interest rate cuts and other forms of monetary easing. So many people believe that the American monetary policy is excessively restrictive, which was the last example in the fall of 2008, when stock prices fell vertically and the global financial crisis raged in full force.

According to the consensus, the Federal Reserve, which plays the role of the US central bank, will cut interest rates a total of three times in the next 12 months, the first time this may take place in September.

The belief of the majority, according to which the world economy will experience a moderate slowdown interspersed with interest rate cuts, is well reflected in the design of the investment portfolios. Most fund managers overweight stocks and underweight bonds in their portfolios.

They buried the real estate sector

Although, in principle, a period accompanied by interest rate cuts should be good for the real estate sector, according to the signs, investment professionals do not share this opinion. So-called REITs, real estate investment companies listed on the stock exchange, enjoy incredible public loathing. A net 29 percent of fund managers hold less of their shares than their benchmark would require. This means that the sector is underweighted to a degree that has only happened once in the survey’s quarter-century history, also during the 2008-2009 crisis.

In principle, this can be explained by several factors:

• On the one hand, although interest rates in the developed world are expected to decrease over the next year, in the longer term the equilibrium interest rate may still be well above what was usual in the period before 2022. Most of the large debt portfolios built up in the real estate sector come from a period characterized by a yield environment of 0-1 percent, and in comparison, 3 percent interest rates represent a significant additional burden as well as 4-5 percent interest rates.
• On the other hand, the large rises that real estate prices produced in 10-12 years can be followed by a period of consolidation lasting up to a decade. However, it was not a developed economy where real estate prices nominally increased 2.5-3 times in 15 years.

The market is preparing for the victory of Donald Trump

Of course, one of the big events of the next year for the American and global economy will be the American elections. However, the authors of the survey did not ask about the person of the next US president, but rather about the effect investors would have on the markets if, after the congressional elections, the same party as the president was the majority in the House of Representatives. In the event of an “overwhelming” Trump victory, this would mean that the Republican majority would remain in Congress, and in the case of a Biden re-election, it would become possible with the melting of the Republican majority.

In the outlined scenarios, most of the experts envisioned a rise in bond yields, a strengthening of the dollar and a positive stock market performance.

At the same time, when asked which area will have the greatest impact on the presidential election, the clear answer was trade with 48 percent. Immigration ran into second place with only 15 percent.

From these answers, it can be deduced that the majority of fund managers now consider Donald Trump to be more likely. After all, the above scenario is nothing but the so-called “Trump-trade”, i.e. the position that can be a winner in the event of Trump’s victory. At that time, the market expects the trade war to intensify and inflation to rise. In addition, there is a general belief that a Trump victory would be unfavorable for the European economy. (We wrote more about this here). It is no coincidence that in the past month, the weight of European shares has decreased most drastically in the portfolios.