The big risk facing cash-rich pro investors

Inflation is no longer the biggest fear among big institutional investors, according to the latest report from this high-profile bank. Our City expert reveals what’s keeping the pros awake at night and what they’re doing about it.

A contrarian buy signal is flashing in global markets after fund managers this week reported a flight towards cash due to worries over rising interest rates.

The latest Bank of America survey found that hawkish central banks are now regarded as the biggest tail risk, prompting a surge in cash allocation to 5.1% from 4.4%.

But a figure above 5% suggests that investors could be under-invested and vulnerable to positive market shocks.

This is known as the Bank of America's Cash Rule, where a figure below 4% in the global fund manager survey would indicate investors are vulnerable to negative market shocks.

This month's contrarian buy signal comes as cash came in at its highest level since May 2020. The more defensive trend reflects almost half of respondents expecting at least two hikes in interest rates by the US Federal Reserve in 2022.

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The survey involving 371 panellists with $1.1 trillion of assets under management took place between 3 and 9 December, meaning it includes the early stages of the Omicron variant.

It shows that global growth expectations have stabilised and that only six out of every 100 investors believe there will be a recession in the next 12 months, indicating that investors remain very cautious but far from being outright bearish.

Even so, investors took the opportunity to rotate to healthcare and reduce their exposure to banks and technology stocks.

Overall, however, positions reported in the December survey show investors still very long equities, particularly the EU and the US, and the most bearish on UK equities.

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Healthcare, banks and tech are in favour globally, as investors shun bonds, utilities, staples and emerging markets. Long positions on US tech stocks remain the most crowded trade in December, just ahead of bitcoin.

Hawkish central banks are the biggest tail risk with 42% of responses, the first time since a period of rate rises by the Federal Reserve in 2018 that this has been the leading concern.

Inflation has been relegated to second at 22%, ahead of a resurgence in Covid-19 at 15%. Despite continuing high levels of inflation, only 36% see the price pressures as being permanent while 55% believe they will be transitory.

Recession remains the contrarian trade, where investors should be long on staples and short on technology, banking and commodities stocks. Should the Fed manage a soft landing once it tightens monetary policy, Bank of America notes this should be positive for emerging markets.