Fund managers ‘most upbeat’ since January 2022 but growth expectations remain pessimistic

The bank found sentiment improved to its “least bearish level” in nearly two years in December, from 2.5 to 3.4, while cash levels have continued to drop this month, down from 4.7% in November to 4.5%, and 5.3% in October.

Yet growth expectations among fund managers remained pessimistic, although had improved in the December survey from a net 57% to 50% expecting a weaker economy.

In terms of economic outlook, most managers (66%) forecast a soft landing for the global economy, while 23% expected a hard landing.

UK inflation falls further than expected in November to 3.9%

When asked about the US economy, 36% said they did not foresee a recession in the next 12 months, in contrast with 32% of respondents who expected the US to fall into a recession in the second quarter of 2024.

Fund managers claimed Chinese real estate was the “most likely source for a systemic credit event”, at 29%, up from 18%, replacing US commercial real estate (25%) in the top spot.

However, an increasing number of investors have flagged the US shadow banking sector as a potential source for a credit event.

Around 80% of fund managers claimed inflation will be lower in the coming months, with 89% forecasting short-term rates will be lower in the next year, and 91% predicting the Fed has “finished its rate-hiking cycle”.

When asked about the biggest tail risks, fund managers placed a global recession and the risk of a hard landing as the biggest risk (32%), followed by high inflation (27%), worsening geopolitics (17%), a systemic credit event (9%), the US election (7%) and a potential banking crisis in China (4%).

Interest rate expectations to shape the path for private markets in 2024

Additionally, a record number of fund managers (62%) expected bond yields to fall in the next twelve months.

On asset allocation, BofA found allocation to cash had fallen to a net 3% overweight – the lowest since April 2021 and down 15 percentage points month-on-month.

By contrast, equity allocation has risen a net 15% overweight, the highest since February 2022 and a 13 percentage point increase month-on-month.

Fund managers also remained bullish on bonds, with asset allocation up 1 percentage point month-on-month to a net 20% overweight, the biggest since March 2009, reflecting the views of 45% of respondents arguing bonds will be the best performing asset class of 2024.

Allocation to commodities dropped by 12 percentage points month-on-month – from a net 3% overweight to a net 10% underweight – as 28% believed the asset class will be the worst performer of 2024, compared to 32% naming cash as the one expected to perform the worst.

Global investors remain set on Goldilocks soft landing despite bearish stance

When asked about stocks, respondents were fairly evenly split: 53% expected large caps to outperform small caps, whereas 47% claimed the opposite.

In terms of sectors, BofA found managers shifted to overweight on banks for the first time since February 2023, from a net 10% underweight to a net 6% overweight.

The opposite trend was registered for energy, with managers now most underweight on the sector since December 2020, with allocation dropping from a net 4% overweight to a net 11% underweight, marking the largest month-on-month decline since January 2016.

Technology also registered modest drops in allocation, with investors going from a net 27% overweight to a net 23% overweight.

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