Top Wall Street investors say they're struggling to find big, bullish stock-market bets to make - and their paralysis might signal a meltdown is looming
- Institutional investors are cautious about risks to the global economy and are simultaneously reluctant to make any major contrarian bets in the stock market.
- Their uncertainty stems largely from the trade war and has left them feeling trapped, according to money managers who spoke to Business Insider.
- Hedge funds' exposure to stocks is near its lowest level since the financial crisis and investor sentiment is weak, data compiled by JPMorgan show.
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Warren Buffett is credited with saying "be fearful when others are greedy, and greedy when others are fearful."
These words of wisdom helped the Berkshire Hathaway chairman earn his stripes as the most legendary investor of his generation.
But these days, institutional investors in stocks are struggling to apply his principle. They are confronted with an investing landscape that contains sufficient risks to be fearful of, but lacks the bullish pointers that would warrant a contrarian posture.
"Institutional investors are cautious but they kind of feel like they're stuck," said Lori Heinel, the deputy chief investment officer of State Street Global Advisors, which manages nearly $2.9 trillion in assets.
"They can't just get out of equities because they need the returns," she told Business Insider during a recent interview. "They're afraid of missing out because this market has been so choppy and surprisingly resilient. But they're also looking at hedges, buffers, and other ways to truncate some of the tail risk."
These comments check out when one looks at the data on large investors' holdings.
In a recent note to clients, Marko Kolanovic, JPMorgan's global head of macro quant and derivative strategy, shared the following two charts to show that investors' views on stocks have become strained.
First, hedge funds' exposure to equities is near its lowest level since the financial crisis.
In addition, investor sentiment as measured by the AAII bull-bear indicator has deteriorated to levels seen during the 2008 financial crisis and the market meltdowns in 2015 and 2018.
"As the US-China trade war destabilizes the global economy and Trump's tweets continue destabilizing financial markets, many managers find it difficult to be invested in equity markets," Kolanovic said.
He added, "The uncertainty brought about by the trade war has erased confidence built over a decade in the equity markets, in our view, both with more sophisticated investors (hedge funds) and individual investors alike."
The bottom line is that many investors aren't seizing this deadlock as a contrarian buying opportunity.
This might be such an occassion, according to Michael Hartnett, the chief investment strategist at Bank of America Merrill Lynch. He said in a recent note that the firm's bull and bear indicator flashed a contrarian "buy" signal for the first time since January.
But his observation came with a warning on what the flipside could look like. Investors' recession fears triggered an exodus from stocks and a record $160 billion flow into bond funds that inflated the asset class. A disorderly exit from bonds could trigger a spike in interest rates and, consequently, a recession, according to Hartnett.
The 'most complex' time to invest
He laid out one specific scenario of how the downside risks may unfold across markets. Meanwhile, investors have their eyes on a broader factor at play: this business cycle appears to be in its twilight period.
"The late cycle is the most complex and challenging period of the market cycle and of the economic cycle," said Erik Knutzen, the multi-asset-class chief investment officer at Neuberger Berman, a $333 billion manager.
"That's what investors are reacting to," he told Business Insider. "I think they are, quite potentially, paralyzed at this point."
Knutzen's advice for responding to this predicament is to consider parts of the world with economic cycles that aren't as mature as the US', and nascent themes like 5G technology and autonomous driving.
The Vanguard FTSE Emerging Market exchange-traded fund, the iShares Self-Driving EV and Tech ETF, and the Defiance Next Gen Connectivity ETF are three ways to invest in these recommendations.
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