Fund managers spooked as pessimism approaches 20-year low

Investor pessimism is close to a 20-year low thanks to the global banking crisis and in line with the Global Financial Crisis, a notable reversal of February’s optimism.

According to Bank of America’s monthly global fund manager survey, which surveyed 244 global fund managers with US$621 billion in assets under management, pessimism was in line with other major financial crises.

The financial system had been rocked in recent weeks by the collapse of Silicon Valley Bank in the US and by Credit Suisse in Europe, which was acquired by UBS.

This month’s sentiment was a turnaround from February’s data, when respondents were at their most optimistic in a year and all key sentiment measures had improved, including growth expectations, equity allocations and cash allocations.

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Now, however, sentiment and positioning metrics were in line with positioning during other major crises, such as the Global Financial Crisis in 2008, the euro-debt crisis in 2011 and the COVID-19 pandemic in April 2020. 

A net 42% of respondents were now expecting to see a recession, up from 24% last month, and over 50% were expecting to see weaker growth in the next 12 months, up from 35% in March.

Cash was on the rise, up to 5.5% from 5.2% in the previous month, which Bank of America said was the first monthly increase since October 2022 and the largest one since September 2022. 

The bank said this marked 15 months that cash allocations had been above 5%, which was the longest period of high cash weightings since the bear market following the dotcom bubble in 2000–02. The historical average for cash weightings was 4.7%.

Unsurprisingly, respondents had quickly exited their exposure to global banks during the month, with allocations falling by 25 percentage points to a net 3% underweight. 

The fear of a systemic credit event is now the number one tail risk at 31%, driven by fears of US shadow banking, compared to less than 10% in February, followed by inflation staying high and central banks remaining hawkish.