Stagflation looms, Europe saves gas, how are the big investors positioning themselves for the end of the year?

Chart of the week

The chart shows gas consumption in Germany in recent years. The black line shows the average consumption between 2018 and 2021. The bars show the current consumption in 2022.
Why it is important
The measures to save gas seem to be working. Less gas is being consumed in Germany than in previous years. Much depends, of course, on the warm autumn.
Germany is the most dependent country on Russian gas in Europe. Many investors do not invest because they expect an energy shortage. Germany would then be the country most affected.

Currently, it looks like these fears are exaggerated and will not materialize.

Stagflation on the horizon

The chart shows the Global PMI (black) and central bank activity (blue). The global monetary stimulus, usually indicates about 8 months earlier in which direction the PMI will move. The Purchasing Managers Index (PMI) , is the most important and reliable leading indicator of economic activity.
In order to fight high inflation, central banks around the world are massively slowing down economic activity. They seem to be succeeding. However, they are slowing down activity to such an extent that most market participants now assume that there is a recession.

The chart shows a survey of the largest institutional investors. They were asked whether they expect a recession in the next 4 quarters. Almost 50% of respondents agree. This is the highest figure since 1970.

The chart shows a survey of the world's largest investors. At the beginning of the year, most of them still assumed high growth and high inflation. This has now changed completely. The majority of major investors expect inflation to remain above average, but growth to be low. The technical term for this is stagflation.
Both companies and private individuals are bracing themselves for a difficult year.

The chart shows a survey of CEOs of American companies. Most of them expect to have to cut staff working hours sharply. The value was only lower during the financial crisis in 2008.

A survey of private investors asked whether they are more likely to be able to invest more or less next year. Most expect to have less capital available next year.
At the same time as the economy is cooling, international supply chains are continuing to normalize.

The chart shows freight rates between Shanghai and Los Angeles. Since last year, these have plummeted by 80% and are almost back to pre-Covid levels.

The chart shows M2 money supply growth in Europe and China. In addition to raising key interest rates, central banks around the world are reducing the money supply. This means that no more money is flowing into the stock markets.

One exception seems to be China, which has already reversed the trend. Many investors are now hoping that the other central banks, especially in the USA and Europe, will not reduce the money supply any further. That would be very positive for the stock markets.  

How are the big investors positioning themselves for the end of the year?
Every month, Bank of America surveys the major institutional investors about their investment policy and where they see the markets.

Here, investors were asked where they see the biggest bubble forming, or in other words, where everyone is already invested and they certainly wouldn't invest anymore.

The strong USD, betting on falling shares in China and the high oil price are the most important mentions here.

The chart shows the USD Index and the value of the above survey of how many investors consider the USD to be overvalued. The correlation of the two lines is very high. The times of the strong USD should therefore be numbered.

In the survey, 80% of institutional investors expect a recession. At the same time, they are concerned about the quality of corporate finances and wish companies would strengthen their balance sheets.

Here, institutional investors were asked whether they overweight or underweight the technology sector. After almost 10 years, the weighting of technology stocks is changing. The underweighting is expected to continue for longer. Technology and growth stocks need cheap money, which is not currently available.

Institutional investors were also asked how high their cash share in investment portfolios is. It is as high as it was last time in 2003! If even just a portion of this money flows back into the markets, we are in for successful stock market months.