They were concerned in February, now gloom has set in among global scale fund managers with optimism at all-time lows, according to the Bank of America survey for March that covers the period post the Russian war in Ukraine.
But while fund managers worry the global economy is heading into a period of rising inflation, weakening growth (ie stagflation) the gloom is not quite as dark as it seems.
“Investors are struggling with the prospect of a really big slowdown in economic growth over the next six months. It is still only a minority that believe that a recession is coming but that view is changing quickly,” said Michael Hartnett, chief investment strategist at Bank of America.
Hartnett said a “staggering disconnect” had emerged between investors’ downbeat expectations for economic growth and equity allocations among global fund managers, which as a group still held a net overweight position in stocks.
“Everyone is bearish on the outlook for growth, inflation, the Fed and US interest rates, but asset allocators are still overweight equities,” said Harnett.
Cash holdings, the best guide to the level of fear for fund managers, eased to 5.5% in April from the two-year high of 5.9% in March.
Fund manager belief in the stagflation scenario is now at its highest since August 2008 – that’s pre GFC which didn’t see stagflation by a sharp recession and then struggling rebound.
That was clear after the 8.5% annual rate for March and forecasts for the Fed to lift its key rate to 2% or more by year’s end, just as inflation is easing and growth has gone off the boil.
The Bank of America surveyed 292 firms in the first week of April who manage more than $US833 billion. It’s the biggest survey of its kind each month.
On expectations for global growth in the coming months, a net 71% of survey respondents were pessimistic about prospects, the highest since the survey records began in the early 1990s.
On top of that, prospects of a global recession remain the top “tail risk” for global markets, the survey found, while the Russia-Ukraine conflict fell to fourth place.
Allocations to commodities jumped to a record 38%, with investments into oil and commodities growing to become the top most “crowded trade.” A few months ago, tech stocks were the most crowded trade, now they are on the nose with interest rates and inflation rising.
Other “long” positions were in resources stocks and healthcare, while “short” bets – by investors expecting a decline in prices – were in bonds and cyclical stocks whose performance is most linked to economic growth, BofA said.
Participants expect the US Federal Reserve to raise interest rates by as many as seven times in the current cycle, compared with four times in the previous edition, with a majority of investors expecting inflation to soften over the next 12 months.
Global profit expectations deteriorated to their weakest levels since March 2020, BofA said.
In terms of regional stock market allocations, investors were most bullish on US shares, while European and UK equities were the top bearish bets.
