Despite having concerns about the recovery, fund managers have only slightly increased cash levels.
Global investors have continued to moderate their expectations for the year, according to the latest Bank of America Merrill Lynch Global Fund Manager Survey.
When it comes to global economic growth, expectations have dramatically declined. Just 27% of respondents said they expected the global economy to improve from here, the lowest number since April 2020, just as the Covid-19 pandemic was starting. The number of fund managers expecting better global growth is down from 91% in March of this year.
Expectations surrounding company earnings have moved in the same direction. Back in March 2021, 89% of investors expected global profits to increase. That has now fallen to just 41%, the lowest since July 2020. The survey also showed a growing number of fund managers expecting profit margins to decline.
Inflation expectations also declined. A net 4% of those surveyed said they expected higher inflation, down from 93% in April of this year. The consensus among fund managers, therefore, is that inflation has peaked. In the US headline inflation remained at a 13-year high of 5.4% in July.
Opinions are still divided on whether inflation is transitory or permanent. However, whereas in July 70% of those surveyed said they expect inflation to be transitory, 65% did so in August. Likewise, there was a small increase (from 26% to 32%) in the number of managers who said they expect higher inflation to be a permanent feature of the global economy.
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The survey also showed that over 80% of fund managers expected the Federal Reserve to cut back on asset purchases – or quantitative easing.
In terms of portfolio allocation, the picture was mixed. The amount of cash held by fund managers on average grew from 4.1% to 4.2% in August. Meanwhile, the number of fund managers overweight equities declined. All of this might suggest growing bearishness about the global economy.
However, on average investors were positioned towards pro-cyclical assets. Relative to history, investors were overweight banks, commodities and eurozone equities – all deemed to be cyclicals. Meanwhile, investors were underweight bonds. However, it is worth noting that investor allocation to cyclicals has fallen compared to previous months.
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When it came to risks, the biggest cited risk to financial stability by fund managers was emerging markets, owing to the recent price declines seen in China due to the tech backlash. The second most common cited risk to financial stability was monetary policy.
The biggest “tail risk” however continued to be inflation, despite declining inflation expectations. For much of the year, investors have cited either inflation or the related risk of a bond market sell-off as the biggest tail risk.
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