Expectations for global growth have peaked among fund managers.
Belief in the so-called reflation trade is now over among many fund managers, according to the latest Bank of America Merrill Lynch Global Fund Manager Survey.
Expectations for global growth have peaked among fund managers. In July, just under half of fund managers (47%) expect the global economy to improve. This is way down from a peak of 91% in March. The July figure coincides with a decline in managers expecting global profits to increase. In July, 53% of fund managers said they expected profits to increase, down from 89% in March.
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Reduced expectations of a stronger economy have also cut inflation expectations among investors. Now, just 22% of fund managers surveyed said they expected higher inflation, 42% less than the previous month.
Currently, around 70% of investors said they viewed inflation as transitory, while only 26% saw higher inflation as permanent.
However, despite reduced growth and inflation expectations, three-quarters of investors still expected the economy to see both above-trend growth and above-trend inflation over the next year.
Fund managers also no longer see commodities – a popular way to play the global economic recovery – as the “most crowded trade”. The July survey showed that “long tech” is now viewed as the most crowded trade. Tech companies tend to be preferred by investors when inflation, interest rates and economic growth are expected to be low.
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On factors, investors are now less bullish on the prospects for value stocks, which tend to be cyclical. The percentage of fund managers surveyed who expect value stocks to outperform growth stocks has now fallen to just 22%
However, investors were still by and large positioned towards more cyclical stocks. Fund managers continue to have a higher exposure to defensive and cyclicals such as eurozone stocks, industrials, materials, and commodities compared to historical norms.
While investors now appear to believe the hype of the global economic recovery has peaked, they are by and large far from bearish. Only 3% of investors expect a bear market in the next six months.
The biggest tail risk cited by investors was inflation, a fear that has consistently appeared in the survey since March.
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