Global fund managers’ growth optimism at all-time low, more correction in stock markets expected

With the US Federal Reserve now hinting at a faster-than-expected rate hike cycle to tame inflation, global fund managers see risks ahead for stock markets, the latest Bank of America Securities (BofA) survey showed. The April fund manager survey is bearish again with global growth optimism at an all-time low since the survey was started. US inflation hit a staggering 8.5% earlier this week, the highest since 1981, propelling fears of a more hawkish US Federal Reserve. Fund managers expect 7 rate hikes by the US Fed, as compared to 4 that were expected till last month.

Sell-on rise strategy

“We remain in ‘sell-the-rally’ camp as Profit-Policy set-up means January-February sell-off was appetizer not the main course of 2022,” the BofA fund manager survey report for April said. The survey said that the US Fed “put” is seen at 3637 for the S&P 500. The Fed Put is the expected level of the index, where it is generally believed that the Federal Reserve will step in to boost the financial markets if markets are correct to such a level. Currently, the S&P 500 is at 4,446.

Global recession fears gaining steam

The monthly survey showed that fund managers from across the globe see global recession as the biggest tail risk with 26% backing the same. This is followed by 25% seeing hawkish central banks as a risk and 21% backing inflation. In the previous month’s survey, almost 45% of the participants had picked the Russia-Ukraine conflict as the biggest risk, the number is now down to 16% in April.

Although the survey shows that investor sentiment is bearish with global growth expectations plunging to their lowest level ever at a net negative of 71%, equity allocation is not reducing. Instead, fund managers were seen trimming their last cash reserves. Cash levels were down to 5.5%, from 5.9% last month as war fears subsided.

Inflation may trend lower, but 7 Fed hikes seen

Switching to inflation, more survey respondents now believe that the rise in prices may trend lower going forward. However, the number of respondents that think inflation is permanent is still at 49%, as compared to 43% who think it is transitory. It is important to note that the respondents that think inflation is permanent are down from 51% in March. To tackle the high inflation that the US is currently seeing, FMS investors are now expecting 7 rate hikes by the US Fed in 2022, up from 4 last month. With this, the US Fed tightening cycle is expected to conclude in April 2023.

Allocation analysis

In terms of sector allocation, fund managers in April have gotten more cyclical (banks, UK, tech, commodities) while at the same time cut exposure to bonds, industrials, discretionary and EM. In terms of geographical allocation, US equities remain the preferred pick.

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