The “Trump trade”, also known as the “reflation trade”, has been a powerful force since Donald Trump won the US presidential election back on November 8.
Stocks – particularly financials – have soared, as has the US dollar. At the other end of the spectrum, bonds have been hammered on the prospect of higher growth, higher inflation and a faster tightening Fed.
It was the overriding theme that dominated markets for close to two months, but it has been faltering recently.
These three charts from the latest Bank of America Merrill Lynch (BAML) Glogal Fund Manager Survey perhaps offer an explanation as to why the “Trump rally” has stalled.
The first shows relative positioning across a variety of different asset classes compared to historic norms.
Clearly, most fund managers are already positioned for a pickup in US growth and inflation with long positions in US banks and dollar, and short positions in bonds, the UK pound and euro, well above normal levels at present.
In what will no doubt raise a few eyebrows, particularly among contrarian investors, many of those assets also feature heavily on the next chart which shows the trades that fund managers believe are the most crowded right now.
Crowded trades refer to investors being positioned the same way in a particular asset.
Almost 50% believe that being long the US dollar is the most crowded trade, with short government bonds and long high-quality US stocks equal second on the list at 11% respectively.
So many of the trades deemed to be the most crowded are those that investors have already positioned for.
The final chart reveals the biggest perceived “tail risks” – a euphemism for threats – for markets in early 2017.
As opposed to past surveys where the largest perceived threats where seen to be outside of the US, in this survey the top two are both directly related to the US president-elect.
29% believe a trade war and increased protectionism is the greatest threat, with a US policy error, at 24%, coming in second on the list.
So, to recap: fund managers are already positioned for the “reflation trade”, they believe many of those trades are looking crowded, and they know there’s plenty of risks, particularly around geopolitics.
While these are just a select few investors — BAML said 215 fund managers participated in the survey — collectively, they manage $US547 billion, so their views are worth paying attention to.
It also goes someway to explaining why the “reflation trade” has come under pressure as Trump’s presidential inauguration approaches.
Indeed, it seems like many investors are already taking notice. Coinciding with the release of the BAML survey, US banking stocks suffered their largest fall in six months on Tuesday.