The collapse of Silicon Valley Bank and concerns about economic growth are fuelling pessimism among professional investors.
Sentiment among professional investors is close to 20-year lows, as fear around the solvency of regional banks in America spreads through markets.
Bank of America’s latest survey of global fund managers, conducted between 10 March and 16 March, shows that contagion risks across US regional banks drove investors out of the sector at the fastest pace since Russia's invasion of Ukraine.
Silicon Valley Bank (NASDAQ:SIVB) in California has been rescued by the US central bank, while First Republic Bank (NYSE:FRC) has had to be supported by large US banks. In Europe, after the survey was conducted, Credit Suisse (SIX:CSGN) was acquired by rival UBS (SIX:UBSG) for €3 billion (£2.6 billion).
Professional investors are now underweight banks and technology shares, and instead are finding opportunities in European and Chinese shares, as well as US dollar, cash, and US government bonds.
By sector, they are the most overweight pharmaceuticals, consumer staples, and materials, and the most underweight consumer discretionary, utilities, and technology.
Fifteen months into the stock bear market, there has not been a conclusive inflection point in economic growth expectations. Around half of professional investors surveyed expect a weaker economy in 12 months, up from 35% last month, and the highest since November 2022.
- Why investors aren’t worried about a repeat of the 2008 bank crash
- Silicon Valley Bank collapse sends Scottish Mortgage shares toward three-year low
- Must read: UBS rescues Credit Suisse, Federal Reserve, UK house prices
The likelihood of recession has risen for the first time since November last year, from net 24% in February 2023 to net 42% this month, the biggest month-on-month increase since last summer.
In response to the gloomy outlook, professional investors have been increasing their cash levels. They now have on average 5.5% in cash, up from 5.2% last month.
Cash allocation has remained above the historical average (4.7%) continuously since December 2021 in a sign that investors are worried about the outlook for financial markets and economies. Over the period, the average cash allocation has been 5.7%.
Despite the concerns about banks, investors generally believe that there will not be a repeat of 2008 when banking problems triggered a deep global recession.
BlackRock Investment Institute, a research team at the world’s largest asset manager, argues that the market gyrations of past weeks are not rooted in a banking crisis, but rather are evidence of financial cracks resulting from the fastest interest rate hikes since the early 1980s.
- ISA investing: why Credit Suisse crisis shouldn’t put you off
- Having a big cash position helps us sleep at night
- ‘High risk? I don’t see it that way’: the investment secrets of an ISA millionaire
The institute says that markets have woken up to the damage caused by rapidly rising interest rates and are now pricing in recessions.
It adds: “The trade-off for central banks – between fighting inflation and protecting both economic activity and financial stability – is now clear and immediate. The financial cracks are unlikely to deter central banks from trying to get inflation back closer to their targets.”
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.