Investors are so ‘unambigiously bullish’ about the economy that there are concerns markets are reaching peak optimism levels, according to Bank of America (BofA).
In the firm’s monthly global fund manager survey, some 69% of respondents expected both above-trend growth and inflation which BofA said was a record high. A net 84% of respondents expected a stronger economy, near all-time highs, and net 83% of investors expected inflation would be higher in the next 12 months.
Almost half (48%) said they expected the economy would be ‘a lot stronger’ in the next 12 months.
They were also holding lower than average cash balances at 4.1%.
“Above-trend growth and above-trend inflation remain at top expectation, with record 69% of FMS investors saying they expect this outcome over the next 12 months, up 12 percentage points, the highest ever,” BofA said.
This was the first sign of ‘peak optimism’ on growth and BofA said historically this had tended to lead to a drop in the 10-year Treasury yield but that central bank policy was different at the moment.
“Five episodes of peak FMS optimism since 1994 were followed by 75bps drop in 10-year Treasury yield but Fed policy stance is very different today, thus FMS shows largest tail risk for investors is inflation (35%) followed by taper tantrum (27%).”
The high proportion of people worried about inflation pushed COVID-19 down into fourth place of investors’ concerns behind asset bubbles.
Allocations to banks remained the largest overweight for the second consecutive month rotating out of utilities and consumer staples and into banks, healthcare, materials and industrials.