Investors’ optimism on the post-pandemic reopening is overcoming their worries about higher interest rates, the latest Bank of America (BofA) Global Fund Manager Survey shows.
The closely watched survey – which polled 239 fund managers running at total of $1.5 trillion about their positioning – found investors had been increasing exposure to stocks and commodities while avoiding bonds and other defensive assets at the start of 2022.
‘Hawkish central banks’ raising interest rates was the main risk that fund managers were worried about at present with 44% citing this as their leading concern, followed by inflation (21%). Just 6% said a resurgence in COVID-19 is the biggest risk.
What fund managers consider to be the market’s biggest ‘tail risk’
Source: BofA Global Fund Manager Survey
The fund managers polled by the bank expected an average of three interest rate hikes from the Federal Reserve in 2022, up from two last month. They thought the first one would come in April, pulled forward from their previous expectation of July.
But these concerns had been overset by the confidence that inflation would prove transitory (only 36% think inflation is permanent) and global economic growth would improve over the coming year.
Just 7% of investors were worried about a recession in the near term and 71% are expecting ‘boom’ conditions of above-trend growth and inflation.
The data shows that fund managers have taken more cyclical positioning recently, reflecting their confidence that the economy will rebound as COVID-19 restrictions continue to be eased.
BofA’s analysts said: “Investors are very long equities, particular in the EU, as well as cyclical banks, commodities and industrials while they shun bonds, defensives (utilities, staples) and emerging markets”.
Fund managers’ net % overweights – Jan 2022
Source: BofA Global Fund Manager Survey
In January, there was a 21 percentage-point jump in the allocation to banks; investors now had a net overweight of 41% to them, close to the all-time high set in October 2017. Meanwhile, fund managers’ net overweight to commodities was at its highest ever.
In keeping with this pro-cyclical stance, there has been a significant increase in the number of fund managers who expected the value style of investing – which tends to perform better when the economy is stronger – would beat the growth style in the coming 12 months. A net 50% of investors said value would outperform growth, up 39 percentage points in the space of a month.
At the same time, they were “very underweight” assets that were vulnerable to interest rate hikes, such as tech stocks, consumer staples businesses and bonds. Fund managers’ underweight to bonds stood at 77%.
The net overweight to tech stocks – which had been the darlings of the stock market for much of the past decade – was “drastically” cut to 1% in January. This was down 20 percentage points from December and took the allocation to tech to its lowest since December 2008.
