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Welcome to RBC’s Markets in Motion podcast, recorded July 7, 2021. I’m Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.
Today in the podcast, we run through the results of our 2Q21 US equity investor survey, conducted June 22nd – 29th. The respondents were mostly US focused and US based portfolio managers. All were institutional investors.
The big things you need to know: Overall, US equity investors remained optimistic, though optimism did fade a bit relative to our late March survey. Cash deployment and economic outlooks are strong, though valuations, margins, inflation, COVID variants, the Fed, and Washington policy are all weighing on sentiment. Interest in reflation trades is also fading.
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Now, let’s jump into the details.
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Starting with the general outlook.
- Overall, US equity investors remained optimistic, though optimism did fade relative to our March survey.
- Those describing themselves as bullish or very bullish decreased slightly for the 2nd quarter in a row, down from 51% in March to 47% in June.
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- Cash deployment and economic outlooks are keeping investors constructive.
- 61% say they are bullish or very bullish on cash deployment, with the most optimism on buybacks and M&A.
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- Meanwhile, 73% are bullish or very bullish on the economy over the next 6-12 months. That’s high, though down from 92% in March.
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- Slippage from peak economic optimism partially explanations the fade in market sentiment, but Valuations and margins/inflation are some of the major villains.
- Those who say that valuations are expensive or very expensive rose to 58%, up from 54% in March.
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- That didn’t surprise us. But something that did was that just 39% expect profit margins to expand, a sharp drop from the 72% who were in the expansion camp in March.
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- We think this is all about inflation. 53% are also worried that inflation is not appropriately baked into consensus estimates and/or company guidance.
- Additionally, 78% are somewhat or very worried that inflationary pressures may bite into demand/economic growth. This helps explain that slippage in economic optimism.
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- On a related note, COVID isn’t over yet in the minds of a decent number of investors.
- 42% said they were very or somewhat optimistic about the variants in our June survey, but 34% said they were somewhat worried. These results were similar to those for a question we asked in our March survey – frankly, we were surprised didn’t see more of a positive shift on this issue.
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Moving on to takeaway #2: We all know that expectations for the Fed’s timetable have been pulled forward dramatically since the last Fed meeting. Our survey helps provide some important context about what exactly is in investors’ heads.
- On tapering, 59% expect it to start between 4Q21 & 1Q22, up from 31% in March.
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- Importantly, 77% also believe it will impact stocks before it begins, with 65% saying tapering will be bearish or very bearish for stocks.
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- On rate hikes, expectations for lift off in 2H22 jumped from 28% in March to 42% in our June survey. Those who say hikes will begin in 2023 or later fell from 45% to 34%.
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- Similar to tapering, 67% believe hikes will impact stocks before they begin, and 65% believe this will be bearish or very bearish for stocks.
- In terms of our own outlook, this adds to our concern about a pullback in stocks in the second half of 2021, as well as our worry that rotation out of Cyclicals, Value, and Small Caps (which tend to inflect negatively during hiking cycles) might start before fundamentals warrant.
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Wrapping up with takeaway #3: interest in reflation trades is fading.
- Cyclicals, Small Caps & Financials are the trades that were the most popular choices for what parts of the market will outperform in the next 6–12 months.
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- But compared to our March 2021 survey, Value, High Volatility, Small Caps and ESG saw the biggest net negative change in those expecting outperformance.
- Europe, Growth, and Emerging Markets saw the biggest net positive change in those expecting outperformance.
- We think this shift is really due to fading economic optimism and the pull forward in expectations on tapering and hikes that we saw in the survey.
That’s all for now.
A huge thank you to all of the investors who the time to fill out survey. We truly appreciate your assistance.
Thanks for listening, and please reach out to your RBC representative with any questions.