Worries about a systemic credit event have surpassed concerns about high inflation, according to the results of Bank of America's March Global Fund Manager Survey released Tuesday.
Specifically, 31% of managers polled in March said a systemic credit event posed the biggest threat to global markets, while 25% pointed to persistently high inflation as the largest tail risk. Nearly 40% of respondents cited high inflation as their greatest concern in the February survey.
Hawkish central banks (15% of respondents), worsening geopolitics (14%) were the other top concerns for managers in March.
Some 34% of respondents cited U.S. shadow banking as the likeliest culprit behind a potential systemic credit event. Other possible sources of such a credit crunch were U.S. corporate debt (17% of respondents), developed markets real estate (10%) and Chinese real estate (8%).
The survey was conducted between March 10 and March 16 (after the implosion of Silicon Valley Bank and Signature Bank) and involved 212 fund managers with $548 billion in assets under management.
Overall, the survey found that investor sentiment is now close to "levels of pessimism seen at lows of (the) past 20 years" and that the S&P 500 index might see a floor of 3,800. (The index closed at 3,951.57 on Monday.)
Regarding major macroeconomic matters, 51% of respondents expect weaker global growth over the next 12 months; while 84% expect inflation to ease over that time; and 88% think stagflation is most likely to emerge.
Fund managers also expect the Federal Reserve to boost interest rates by another 75 basis points in the current cycle, with the Fed funds rate peaking at 5.25% to 5.5%. (In the February survey, most respondents saw rates peaking at 5% to 5.25%.)
Still, there is growing optimism that the Fed will begin to cut rates at some point in the next 12 months — 57% of managers expect lower short-term rates within a year. Moreover, 84% of participants think headline inflation will be lower a year from now.
About two-thirds (65%) of survey participants do not think the Fed will raise its 2% inflation target in the next two years.
However, managers remain worried about a recession. Some 42% of respondents think a recession is likely over the next 12 months, up from 24% in February. As a result, 55% of respondents want corporations to improve their balance sheets.
In addition, the survey found that managers have become very bullish on eurozone stocks relative to U.S. equities — they are now at their most overweight position in European equities relative to U.S. stocks since October 2017. The survey also noted that the rotation out of U.S. equities and into European stocks accelerated in March.
Moreover, fear of contagion risks among U.S. regional banks following the SVB crisis drove investors out of that subsector at the fastest pace since Russia's invasion of Ukraine in February 2022.
