According to Bank of America's global fund manager survey report released on Tuesday, institutional investors have significantly reduced their long positions in stocks and increased their cash asset allocation since August due to the lowest global growth expectation in eight months and rising US recession expectations. According to the survey, 31% of respondents said they increased their stock assets in August, far lower than the 51% in the same period in July, while their average cash asset allocation accounted for 4.3% of their managed assets, up from 4.1% a month ago.

Bank of America attributes this significant shift to the weak non-farm employment data in the US in July and the unexpected rise in the unemployment rate, as well as stock market volatility related to the rebound of the yen exchange rate. After the non-farm employment data and unemployment rate were released, the Nikkei 225 index experienced its largest single-day drop since 1987.

Market participants also pointed out that the sharp appreciation of the yen exchange rate and the significant reduction in the scale of leveraged arbitrage trading by many speculators to increase their bets as the yen appreciated, were also major reasons behind the sell-off.

In addition, the total assets of US money market funds have reached a historic high, mainly due to investors flocking to cash for safety after the global risk asset sell-off, especially on 'Black Monday' earlier this week. According to the latest statistics from the Investment Company Institute (ICI), approximately $52.7 billion flowed into US money market funds in the week to August 7, the largest weekly inflow since the week ending April 3, increasing total assets from $6.135 trillion to $6.19 trillion.

Money market funds invest in short-term, highly liquid financial instruments such as short-term Treasury bonds, commercial paper, and bank deposits. Due to the high liquidity, extremely low risk, and price stability of this type of fund, it can meet the needs of investors to redeem at any time. Money market funds are often regarded as the equivalent of cash that can be quickly liquidated by investors, hence they are a common choice for investors seeking a safe haven during market volatility as well as meeting short-term cash management needs.

The value of risk assets such as global stocks suffered a severe setback during 'Black Monday,' which in turn attracted a huge amount of funds seeking shelter in money market funds. Before rebounding on Tuesday, the Japanese stock market experienced two consecutive days of record-breaking declines, while 'Black Monday' led the global stock market to crash mainly due to the recent heating up of US economic recession expectations due to the unexpected rise in the unemployment rate, coupled with the accelerated appreciation of the yen exchange rate, which prompted rapid unwinding of global arbitrage transactions, forcing some traders to sell a large number of highly liquid positions in US technology stocks and other stocks to offset the enormous losses caused by borrowing yen, also causing the entire financial market to fall into the vicious cycle of sell-off risk assets on Monday.

In recent trading days, however, global stock markets, including Japanese and US stocks, have accelerated their rebound under buying pressure, but the gap from the historical high in July is still very clear. This may indicate that some institutional investors are still taking advantage of the turmoil in the stock market to seek short-term profits by buying low.

The Bank of America said 189 global fund managers with approximately $508 billion in assets under management responded to the survey. A net 47% of respondents expect global economic weakness or softening over the next 12 months, a decline of up to 20 percentage points from July.

However, 76% of respondents said they still expect a "soft landing" for the global economy, meaning a gradual slowdown rather than a more dramatic "hard landing" or "no landing" scenario, in which economic growth does not slow at all.

Bank of America said this belief was "driven hard by expectations that the Federal Reserve will cut rates," as 93% of respondents expect short-term rates to come down rapidly within 12 months, when short-term rates are still at their highest levels in the past 24 years.

BofA's survey also found that as many as 60% of the respondents expected the Fed to cut interest rates four times or more in the next 12 months.

The allocation of funds in the Japanese stock market has seen the largest monthly decline since April 16. Institutional investors went from a net increase of 7% in July to a net decrease of 9% in August, the first net decrease in a BofA survey since July 2023.

Editor/ping