Global fund managers fear inflation more than covid-19; remain bullish on growth expectations

Fund managers across the globe are over the fear covid-19 pandemic, according to Bank of America’s (BofA) recent fund manager survey. Among the 194 fund managers surveyed by the global investment bank, as many as 35% of the respondents believe inflation is now again the biggest risk for markets. Meanwhile, only 9% believe covid-19 to be the biggest tail risk for investors. Although inflation is seen as a risk, 69% of the respondents continue to remain bullish and expect an above-trend growth accompanying their expectation of above-trend inflation. 

The bullish bias of fund managers is reflected well in the low cash levels they have been sitting on. BofA showed that cash levels are as low as 4.1%, implying that most of the investable money available has been invested. On-month basis, investors have moved towards late cyclicals such as energy. Stapes, REITs, banks, utilities, and materials have also seen a positive change in terms of investor positioning, according to the survey. On the other hand, Emerging markets, technology, and commodities have seen a negative trend. Allocation towards the technology sector is the third-lowest since 2006.

With US equities reaching fresh highs repeatedly, fund managers continue to back the S&P 500. 29% of the respondents believe S&P500 will outperform in 2021, down slightly from the previous month. Meanwhile, for bond yields, fund managers are of the view that when yields near 2%, stock markets could witness a correction.

Further, the survey showed that fund managers have aligned their portfolios towards stocks with high-quality earnings and those with high-quality dividends. Smallcaps seem to be losing their shine, with only 14% favouring them in May, as against 35% in March this year. Meanwhile, value continued to remain the most favoured trade. “48% of FMS investors think value will outperform growth in the next 12 months. It continues to be the most favoured factor in the last 6 months with the exception of small-cap in February 2021,” BofA said. 

Catching up on the recent euphoria around cryptocurrencies, as many as 43% of the fund managers said that ‘Long Bitcoin’ has overtaken ‘Long Tech’ as the most crowded trade. However, since the survey, Bitcoin has tumbled at least 18%. Technology has moved to the second spot, followed by Long ESG, and then short US treasuries.