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
The main finding of the global survey is that investor confidence has deteriorated this month, as it also did in April, reaching its lowest level in the whole of 2023. This is because investors are increasing cash flows from balances and have become more pessimistic about growth prospects.
The main findings of the global BofA survey are as follows:
- Some 65% of FMS investors now expect a weaker economy, up from 63% in April and also reaching the most pessimistic level in 2023.
- On the other hand, optimism about a strong rebound in China is fading (55% net expect a stronger Chinese economy, down 28 percentage points from the previous month), leading to a reduction in equity allocation to emerging markets (24% net overweight, down 6 percentage points month-on-month and the lowest overweight position since December 2022).
- Despite this, concerns about a recession remained stable month-on-month: in May 2023, a net 47% of investors said a recession was likely in the next 12 months compared to 48% in April.
- Almost two-thirds of FMS investors (63%) see a “soft landing” as the most likely outcome for the global economy; 1/4 expect a “hard landing” as the most likely scenario, while a few expect “no landing”.
- Expectations of a “soft landing” corroborate expectations of a moderate downturn in earnings per share (EPS). FMS investors expect overall revenues to fall by only -0.8% (weighted average response) over the next 12 months (29% expect a 0-5% decline, 28% expect a 0-5% increase).
- Moreover, 61% say that the Fed has completed its rate hike cycle, while 1/3 say it has not. 43% believe that the Fed will cut rates for the first time at the FOMC meeting on 24 January (1Q24) (24% say 4Q23, 14% say 2Q24).
Survey of European fund managers
In the European survey, 77% of European investors believe the European economy will weaken in the coming year, up from just over 75% last month. A clear 65% of global investors believe that world growth is about to slow, up from 63% in March.
The main findings of the BofA global survey are as follows:
- Growth expectations are lower but recession worries ease: Less than 5% of respondents to our survey this month believe European growth can pick up further as energy headwinds and inflationary pressures ease, and 70% expect a slowdown due to monetary policy drag. 67% of investors expect aggressive monetary tightening to lead to a loss of momentum in US growth (down from 58% last month), while only 39% expect a stronger Chinese economy next year (the lowest level since November). However, most now expect Europe to avoid a recession, with the proportion of investors expecting a recession in the next 12 months falling to a one-year low of 37% (well down from 58% last month).
- Consensus on Demand Destruction and Lower Inflation: A 56% majority of investors in our survey expect demand destruction in response to deteriorating credit conditions to be the dominant macro theme in the coming months, essentially unchanged from last month. A clear 95% expect European inflation to fall over the next twelve months, the highest rate on record (with data going back to 1994). However, 29% still see high inflation and tight central bank monetary policy as the biggest risk to markets, second only to the 33% who rank the credit crunch as their main concern. Fifty-eight percent believe that short-term interest rates will fall in the next 12 months, close to their highest level since 2008, while 12% believe that 10-year government bond yields will fall.
- Most investors remain pessimistic about European equities: 72% of investors expect a fall in the European market in the coming months in response to monetary tightening (up slightly from 70% last month), and 51% expect a fall in the next 12 months (down from 55%). 84% see European earnings declining in response to slowing growth and falling inflation, with a majority of 26% seeing earnings cuts as the most likely cause of a market correction, followed by financial stress at 25%.
- Pharmaceuticals are most popular in defensive rotation 53% of respondents see more downside for European cyclical than defensives in response to slower growth, down slightly from 58% last month. Technology loses the top spot as Europe’s most overweight sector to pharmaceuticals, with utilities and food & beverages rounding out a solid defensive push in the top four overweight positions. Real estate remains the least appreciated sector, now followed by mining, while banks are slightly undervalued. Among European countries, France remains the most overweight, followed by Switzerland, while Italy and Spain are the least preferred.
