00:00Bank of America releasing its December Global Fund Manager Survey, showing macro optimism at its highest going back to 2021.
00:07Joining us now is Elias Galou of Bank of America. Elias, great to see you. Thank you so much for being with us.
00:13Let's start on the cash holdings. The idea that cash allocations fell to 3.3 percent, the lowest in Bank of America's Global Fund Manager Survey.
00:21How much of a contrarian indicator do you see this as?
00:23This is a very contrarian indicator, Elias. Just a bit of context on the FMS cash levels, which fell to a record low 3.3 percent today.
00:35This series is one of the most important of the Fund Manager Survey. It has been around since 1999.
00:42So we are able to track several cycles through this series and even at the height of the Internet bubble, at the height of the subprime bubble.
00:51And during the bond bubble of the post-GFC era, the FMS cash level did not drop to the level it did today, 3.3 percent, which is just strictly speaking and focusing on this metric.
01:05This is a very bearish contrarian signal. And we backtested this series since over the past 25 years.
01:12Whenever the cash level fell to 3.6 percent or below, the average four-week return for global equities has been minus 2 percent.
01:21And over eight weeks, it's been global equities were flat.
01:25Elias, how do you score this with the idea that people are really optimistic about 2026 returns?
01:30Is it consistent, given the fact that we might see sort of meandering stock returns heading into year-end, kind of what we're seeing this morning?
01:36But next year, people will see that fiscal stimulus come in, that monetary stimulus come in, and it will really support this sort of broader story that people seem to be leaning into.
01:47I think if we had to define the December 2025 Fund Manager Survey, it would be the most bullish survey of this AI-led bull market.
01:56And the culprit of this palpable bullishness is the expectation of run-it-hot policies.
02:03FMS investors look at the Fed. They know and are convinced that the Fed under the next chairman will be much more accommodative than in the past few years.
02:13They know that there is a big election in the U.S. on November 3rd next year, and they expect the administration to push a bit further in terms of fiscal policy.
02:22And they also, you know, last week's announcement from the Fed in terms of the liquidity backstop, I think has clearly emboldened FMS investors to increase allocation to risk assets.
02:33Because another important metric that was, you know, was extreme in this survey was the fact that liquidity conditions were rated as the most positive since 2021.
02:43And in fact, over the past 20 years, liquidity conditions have only been greater than today at the peak of the of the covid boom in mid-2021.
02:56Elias, long mag 7 and long gold have been the most crowded trades for the past three months in a row.
03:01Yet at the margin, a small handful of investors are now, they now believe that being short JGBs and long global bank stocks are the most crowded trades.
03:08So I'm curious, you know, it's notable given the impending BOJ rate hike at the end of this week, the near universal belief that yield curves are going to steepen across the globe.
03:18I mean, can you provide just a bit more color on these newly referenced pain trades?
03:24Sure. I think if you look at in the details of the fund manager survey, the one challenge where it's actually tough to square institutional investor bullishness is on expectations for bond yields.
03:35There is this big conviction that bond yields will be higher in 12 months time.
03:40This huge conviction, net 75 percent see an even steeper yield curve.
03:45And then investors are very bullish risk assets.
03:49So, you know, at the end of the day, it's important to take a step back and look at the big picture.
03:53And the most important question here, Damien, is can risk assets, global equities, U.S. equities that are very rich in terms of valuation,
04:01withstand 5 percent plus bond yields?
04:04And I think, you know, at this level of positioning, at this level of valuation, risk assets will be struggling if the 30-year Treasury exceed 5 percent,
04:13which has been a line in the sand for U.S. policymakers.
04:17But for now, investors prefer to focus on AI, the productivity gains that AI adoption will deliver in terms of EPS growth.
04:26And this is what they prefer to focus on and is also driving their bullishness in 2026.
04:31Now, Elias, despite the pro-cyclical rotation into equities and commodities, allocation to the energy sector is nearly two standard deviations below the 20-year average, according to your FMS.
04:41Yet with Brent crude now dipping below $60 this morning and most analysts calling for it to stay there, is there any benefit in fading that call?
04:49It's one of the big contrarian trades of 2026, really.
04:55You know, one, the energy sector has been, has seen a continuous underweight of FMS investors and rightly so.
05:03Now, I think it's quite interesting to see the dichotomy between an increase, an increasing allocation to commodities.
05:10The net overweight on commodities is the highest in September 2022, but at the same time, a very big underweight on energy.
05:17And that dichotomy is explained by the, is explained by the divergence between metals and energy.
05:24I think in 2026, if growth surprises to the upside, as investors expect, I think clearly there is a lot of value in the energy sectors and probably, you know, the stronger growth will push the oil price higher.
05:39On the flip side, Elias, how much do you see a potential contrarian trade in bonds, in particular long bonds?
05:45This idea that maybe people are over their skis with how much growth could increase and something's got to give, either it's stock valuations or it's where bond yields are.
05:55And maybe it's the bond yields leading to a risk off mode, some moves, something that people are sort of not positioned for at all.
06:02Sure. I mean, what you saw this month, Lisa, is a very big rotation out of bonds and also a big underweight when it comes to bonds, the biggest underweight since October 2022, when the move index was above 160, i.e. rate volatility was a lot higher than it is today.
06:20And look, what is happening at, you know, in this morning in the U.S., there is big macro news, the November, you know, jobs report.
06:30And if that report surprises on the downside with a very weak payroll or even a negative payroll, I think, you know, that's the pain trade of the day.
06:38It's going to see bond yields sharply lower.
06:41And what I think is the biggest pain trade of macro investors, a flattening of the yield curve.
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