Not Covid-19, Fund Managers See This As The No. 1 Risk: BofA Survey

Fund managers overseeing $630-billion assets don’t see Covid-19 as the biggest risk to equity markets for the first time in a year.

Over the last 12 months, Covid-19 has been the top investor “tail risk.” This month, however, for the first time since February 2020, 37% of the 220 fund managers surveyed by BofA Securities see higher-than-expected inflation as the largest risk, followed by taper tantrums in the bond market (35%).

A record net 93% of the panellists expect higher global consumer price index inflation in the next 12 months, rise by seven percentage points in March, said the survey conducted through March 5-11, 2021. A bubble on Wall Street, higher taxes and greater regulations are some of the other risks to equity markets highlighted by the fund managers.

Cash Levels

Fund managers continued to deploy more cash to equities. While the cash level rose for the first time since July, it remained lower at 4%. The level stood at 3.8% in February—the lowest since March 2013. A reading of less than 4% indicates greed and over 5% fear.

Consensus Shift

The March survey showed investors were once again piling into cyclicals after they bought the “safety of growth” in February. “This is a drastic 180 from a year ago when investors were heavily invested in ‘defensives’.” They increased their exposure to sectors such as insurance, banks, energy, discretionary and commodities, while technology, emerging markets, telecom, healthcare, among others, saw a cut.

Separately, the survey saw investors rotating out of technology, utilities and staples and into industrials, banks and discretionary stocks. Allocation to technology plummeted 24 percentage points month-on-month to only net 8% overweight, the largest such change since August 2006 and lowest since January 2009.

But ‘long tech’ remained the most crowded trade, followed by ‘long Bitcoin’ and ‘long ESG’. In contrast, overweight on banks is the largest since March 2018, while that on energy is the largest since November 2018.

Return Of The ‘V’

Fund managers now expect the global economy to have a ‘V-shaped’ recovery compared to their earlier projection of U and W-shaped. Compared to 10% in May 2020, 48% of the participants are in sight of a 'V-shaped' recovery now.

Correction Trigger

None of the fund managers surveyed expects Treasury yields at 1.5% to be a trigger to cause a heavy correction in equity markets. 43% of the participants said 10-year treasuries at 2% will be the ‘level of reckoning’ as that may end up causing a 10% correction in stocks.

On average, the majority of the participants said treasury yields at 2.5% will make bonds attractive as compared to stocks.

Growth Vs Value

A record 52% fund managers now expect value stocks to outperform growth stocks over the next 12 months.

Other Key Highlights

• A record 91% of fund managers surveyed are expecting a stronger global economy over the next 12 months.
• CIOs continue to expect from CEOs that they will increase capex as compared to improving balance sheets and return cash to shareholders—at 52%, this is the highest since January 2021.
• Only 66% of the participants now expect a steeper yield curve, down from 82% in February. This was driven by a large number of fund managers now expecting higher short-term rates.
• Only 15% of the fund managers see that the U.S. equities are in a bubble. While 25% think of this as an early-stage bull market, a majority of 55% said this is a late-stage bull market.
• Most of the participants said the U.S. Federal Reserve will start hiking rates from February 2023.
• Investor optimism to commodities increased to 28% — the highest ever. The last instance of such positivity was in February 2011 when Brent crude traded in excess of $100 a barrel.