As it does every month, Bank of America has published its survey of Global and European fund managers on the economy and investments. Here are the main findings:
Global fund manager survey
In the survey conducted between June 2 and June 8, 2023, 9% of respondents consider AI/tech the biggest tail risk for the first time.
Still, this is the lowest tail risk they see, as the majority (36%) see as a tail risk the high inflation keeps central banks hawkish. 22% believe that bank credit crunch & global recession is other tail risk.
Moreover, 17% think Geopolitics worsen (e.g., Russia/Ukraine, China/Taiwan) and 13% see a systemic credit event.
Start of recession punted into Q4’23/Q1’24: Investors remain bearish on economic growth…a few think the economy will avoid some sort of recession in the next 12 months, but the start of the recession has been pushed out to Q4’23 or Q1’24. Note rising 14% of investors see no recession in the next 12 months.
Consensus is for Soft Landing: 64% expect a “soft landing” for the global economy, 26% say “hard landing” & just 3% expect “no landing” at all.
China macro optimism flips back to pessimism: FMS investors have revised down their growth expectation for the Chinese economy; a big rally in China growth expectations (in Jan’23 91% of FMS investors expected stronger economic growth) has completely reversed back to Nov’22 levels.
Only 2% of investors expect higher inflation: Strong conviction from FMS investors that inflation will be lower a year from now; only 2% expect higher inflation. This translates into big expectations for lower short-term rates (i.e. Fed cuts): the % of FMS investors saying short-term rates will decrease next 12 months is up to net 67% in June, from net 43% at the start of the year.
Flip-Flop Fed: Despite FMS investors’ strong conviction that the Fed will have cut rates one year from now, expectations on the next Fed move have flip-flopped. 59% of FMS investors think the Fed is not done tightening in June, a reversal from May when 61% said the Fed was done hiking rates.
European Fund Manager Survey
This survey was also conducted between June 2 and June 8, 2023, and an overall total of 285 panelists with $765bn AUM participated in the survey.
Investors expect growth to slow but no ‘hard landing’
70% of participants think European growth will weaken over the coming months in response to monetary tightening, in line with last month’s reading, with the proportion expecting a European recession seeing a renewed rise from 37% to 52%. A majority of 52% sees US growth slowing on the back of tighter Fed policy, but think it will remain resilient in the near term, a meaningful rise from 30% last month, with the share that sees immediate US growth weakness down from 67% to 45%. Only 26% of investors see a ‘hard landing’ as the most likely outcome for the global economy, with nearly two-thirds expecting a ‘soft landing’ (little changed from last month).
Inflation concerns resurface as credit risks subside
50% of investors expect demand destruction due to deteriorating credit conditions to be the dominant macro theme over the coming months, though this is down from 56% last month, with the share believing that high inflation will persist rising from 16% to 25%. A plurality of 36% see sticky inflation and hawkish central banks as the biggest risk for markets, up from 29% last month, while the proportion thinking that a credit crunch is the main risk is down from 33% to 22%. Yet, over a twelve-month horizon, almost 90% are still convinced that inflation will decline. A net 24% think global fiscal policy is too stimulative, up from 16% in May and the highest since April last year.
Investors are bearish now but constructive medium-term
73% of investors expect downside for the European market over the coming months in response to monetary tightening (marginally up from last month), though a majority of 52% now project upside over the next twelve months (up from 44%). 84% see a downside for European EPS in response to slowing growth and fading inflation, with a plurality of 30% regarding earnings downgrades as the most likely cause of a market correction, followed by sticky inflation, at 25%. A net 23% see European equities as overvalued, the highest proportion since December.
Defensive and tech sector leadership remains in place
48% of respondents see a downside for European cyclical relative to defensives in response to slowing growth, down from 53% last month, while 30% project flat performance, up from 23%. The top-3 consensus sector overweights remain the same as last month, though with a slide change of order, with utilities now the most preferred sector, followed by tech and pharma. Real estate ranks as the most disliked sector for a fourth consecutive month, followed by construction and media. Banks stay in the mild underweight territory, but overall negativity has subsided, with less than 5% judging this to be the sector with the most downside, down from almost 15% last month.