Inflation bigger worry than COVID-19

One year after the declaration of COVID-19 as a pandemic, the virus been bumped into third place for fund managers’ worries for the first time behind rising inflation and a taper tantrum, according to Bank of America (BofA).

In its monthly Global Fund Manager Survey, Bank of America said COVID-19 had been rated as the top investor tail risk for the last 12 months.

However, this month it was pushed down into third place behind inflation and taper tantrums which were named by 37% and 35% of respondents respectively. Some net 93% of respondents said they expected to see higher inflation over the next 12 months, the highest rate since May 2004.

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The average expectation for rising interest rates from the Federal Reserve was February 2023.

It had now been over a year since COVID was named as a pandemic by the World Health Organisation.

In line with the reduced fears about the pandemic, the percentage of respondents who were expecting a strong economy this year had risen to 91% which BofA said was the “best outlook ever” while 52% of fund managers expected value would outperform growth in the next 12 months.

Respondents’ allocations were mostly in cyclical sectors with high exposure to industrials, banks and commodities, described as “a drastic 180” from allocations a year ago which was skewed heavily to defensive sectors such as cash, healthcare and consumer staples.

“Fund managers ‘cyclical rotation’ resumed in March as investors bought more cyclical sectors. For the first time in over a year, banks have now risen into the ‘rising optimism’ quadrant while technology has fallen into the ‘rising pessimism’ quadrant. Energy is the only cyclical sector that has not seen a drastic rise in allocation,” it said.

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