Fund managers say they’re feeling festive. Here’s what’s under the tree

A monthly survey of some of the world's biggest fund managers reveals what they think about the global economy and inflation, and what assets they like now and for 2023.

Every month, Bank of America (BofA) sends out its Global Fund Manager Survey (FMS) to try to get a sense of what institutional investors think about markets and the economy. And this month, a growing percentage of the 281 pros surveyed (collectively, they manage portfolios worth more than $725 billion) said they’re feeling a bit more optimistic. Let’s take a look at what they said about the global economy and inflation, and what assets they like now and for 2023…

How are they feeling about the global economy?

Far fewer of the respondents – 68% – surveyed in the first week of December said they see a recession developing in the next 12 months. That’s down from 77% of them in the November survey. And in large part, that’s because of China’s steps toward reopening its economy and the impact that’ll have around the world. In the latest survey, 77% of fund managers said they see a stronger Chinese economy in 2023 – a huge jump from just 13% a month earlier. It’s the most hopeful this group of investors has been about China since May 2021 and the biggest monthly improvement in sentiment since January 2020. What’s more, almost 75% said they expect China to fully reopen its economy by the end of 2023.

The net percentage of respondents who said they expect a stronger Chinese economy. Source: BofA.

How are they feeling about inflation?

It’s still the top worry among these fund managers, for the sixth month running. But a record 90% of them now say inflation has peaked, with the US rate likely to fall to 4.2% in the next 12 months. This aligns with what the Federal Reserve has outlined, an eventual end to its hiking cycle that sets the stage for shorter-dated US Treasury yields. Some 42% of the fund managers said they expect rates to fall, the most since March 2020.

Fund managers, on what they see as the biggest market risks. Source: BofA.

What assets do they like?

First and foremost, they like government bonds, with 27% expecting them to be the top asset class in 2023, compared to 25% for stocks, and just 4% for crypto.

Asset performance views for 2023. Source: BofA.

And they’re not alone in that view: US government bonds are broadly expected to do well in 2023, as the long string of interest rate hikes from the Fed filter through the economy, likely creating an economic recession and thereby raising the risk of credit defaults. It’s a dreary picture, and it’s one that adds to the allure of safe-haven assets such as bonds.

Despite that view, the fund managers aren’t all about the gloom. In December, they held 5.9% of their assets under management in cash, a bit less than the 6.2% they held in November. This indicates a slightly more positive outlook about market opportunities and risk-taking.

Cash levels as a percentage of assets under management. Source: BofA.

You can use the cash levels as a tactical tool for signaling when to buy or sell global stocks. When they’re above 5%, that suggests it might be a good time to buy, and when they’re below 4%, it suggests it may be a good time to sell. But, as with all market signals, this one is best considered alongside the bigger picture – you don’t want to rely on this one all on its own.

For now, the fund managers say they like stocks, or at least some stocks. They’re keeping some distance from shares across major developed countries, especially the UK, on average underweighting the country in their portfolios by 18%. But they’re warming up to stocks from the riskier, emerging market economies, and on average are about 13% overweight in those.

Collectively, they’re steering clear of consumer discretionary stocks and going light on utilities and telecommunications companies. But they’ve been loading up on healthcare stocks, and to a lesser extent piling on the consumer staples and energy firms.

Stock sector net percentage overweights. Source: BofA.

They’re keen about gold’s prospects: with 21% saying it’s undervalued, the most since at least 2008.

But they’re not keen about the prospects for the US dollar, with 51% (the most since 2006) expecting it to depreciate. They’ve been eying the greenback for some time, viewing it as the single-most crowded trade out there. So there’s potential risk there for a significant selloff.

Most crowded trades. Source BofA.

Luke Suddards is an analyst at finimize.

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