Big global investors continue to be nervous about higher inflation but that isn’t stopping them remaining very bullish about the outlook.
But the concerns about inflation and confidence in the economic rebound are not quite so strongly held as they were in April which looks to have been the month for peak concern and peak bullishness.
Despite assurances from the US Federal Reserve that the current spate of price increases is “transitory”, global investors still see inflation as the biggest threat to their portfolios, according to the May edition of the monthly Bank of America Global Fund Manager Survey.
A record 69% of respondents to the monthly reading see above-trend growth and inflation as the most likely scenario ahead.
Bank of America said the 69% reading is a record high, so big investors are very bullish, despite those fears about inflation.
What’s more, inflation is seen by 35% as the biggest “tail risk,” or unlikely event that could cause substantial damage.
And the bullishness can be seen in other areas as well.
A total of 194 fund managers overseeing $US592 billion in assets were involved in the May survey and of these a net 84% expect a stronger economy, and a net 78% expect global profits to improve over the next 12 months.
Although both survey results are each down 6 percentage points from last month, they’re still near all-time highs.
Interestingly, a net 83% of respondents said they expect higher inflation in the next 12 months but that was down 10 percentage points from last month.
But more fund managers — a net 63% — are expecting higher short-term rates, up 6 percentage points from April.
But despite this bullishness, more investors seem to be of a defensive mind set at the moment.
While cash is relatively low at 4.1% (it was as high as 4.8% in the first quarter of the year) more managers are trying to position themselves for the expected rise in inflation with asset allocation to commodities and cash up and allocations to equities down.
Despite the continuing problems in India and much of non-China Asia, Covid is ‘Oh So Yesterday’ as a concern for big investors.
A year or so on from the onset of the pandemic, only 9% of fund managers surveyed cited COVID-19 risk as the biggest tail risk.
Inflation now tops the list of biggest potential tail risks, at 35%, followed by a “taper tantrum” (27%) and asset bubble (15%).
And the most crowded trade at the moment? Long bitcoin. The survey found that nearly 45% of respondents indicating it ahead of other trades like “long tech.” The survey also identified that position in its January survey (and back in September 2017 according to some reports).
After this week’s sell off, you have to wonder what has happened to the long position now.
And while allocations to equities are down, big global investors did charge into the UK market (and also sold off tech stocks as well because of those inflation fears).
The survey shows that allocation to UK shares in May was the highest since March 2014, as Brexit calmed down and the economy re-opened after a couple of strict Covid-19 lockdowns.
