Record Jump into U.S. Equities as Risks to Global Economy Heighten

In September, fund managers made a significant shift from emerging markets to U.S. equities due to increasing risks in the global economy, according to Bank of America's monthly survey. BofA investment strategist Michael Hartnett noted that there was a "dramatic shift" to U.S. equities and a record drop in emerging markets as China's growth optimism plummeted to lockdown lows.

The survey, conducted between September 1 and 7 with 222 participants managing $616 billion in assets, revealed a 29 percentage point increase in the allocation to U.S. equities and a 25 percentage point decrease in the allocation to emerging markets.

This trend is reflected in the performance of U.S. stocks this year. The S&P 500 has surged by 17% in 2023, while the Vanguard FTSE Emerging Markets ETF has only gained 3.2%. Additionally, the tech-heavy Nasdaq Composite has experienced a remarkable 33% jump as investors bet on the future of artificial intelligence. Hartnett's research also highlighted that the most crowded trades in September were long positions in big tech and short positions in China equities.

China, the world's second-largest economy, has encountered challenges with ongoing Covid-19 lockdowns, a troubled property market, and an overall slowdown in the services sector. Traders and fund managers have grown concerned about these developments, leading them to favor U.S. equities like never before.

However, recent Chinese inflation data has shown better-than-expected results. With the U.S. equity market already heavily crowded, fund managers may now consider positive catalysts abroad to reinforce their positions in global markets going forward.

Despite this, Hartnett pointed out that the consensus among fund managers is that the global economy will weaken over the next 12 months. He also mentioned that China's growth optimism this month is currently lower than it was in September 2022, prior to the country reopening from its pandemic-induced shutdowns.