While global investors are increasingly confident that the global economy is headed for a so-called soft landing, they have lost some of their fears about inflation, according to the July Bank of America Global Fund Manager Survey, released on Wednesday.
The survey showed that 68% of respondents now expect a soft landing as the most likely outcome for the global economy over the coming 12 months. This is the highest percentage of respondents agreeing with such an outcome since the start of this year and ties for the second-highest reading on this point in the past year.
Despite this optimism, global growth expectations have plummeted to -27% from -6%, the largest month-on-month decline since March 2022, with sentiment among fund managers falling to a four-month low.
The forecast for a soft landing aligns with how fund managers are currently evaluating the balance of risks to markets. For the first time in six months, inflation wasn’t the No. 1 ‘tail’ risk listed by respondents. The top concern is now geopolitical conflict.
Some 26% of those managers surveyed said that “geopolitical conflict” was the biggest tail risk, up from 22% in June, overtaking inflation as the top such risk for the first time in six months. Since mid-2022, concerns surrounding inflation and central bank interest rate rises have dominated as tail-risk worries for the monthly BoA survey.
Despite agreement from 39% of investors that monetary policy is too restrictive, those surveyed remained optimistic that interest rate easing will reach the soft landing ‘goldilocks zone.’ A “no landing” outcome over the next 12 months hit a six-month low of 18%, while only 11% of investors saw a “hard landing.”
The 585 respondents were surveyed between July 5 and July 11, meaning the last day of the survey coincided with the better-than-expected June Consumer Price Index. This means many of the respondents may have submitted answers to questions before the inflation report that has sent markets surging over the past week, though not on Wednesday of this week, with the big sell-off on Nasdaq.
The survey was also conducted two days before the attempted assassination of Donald Trump on Saturday.
It is positive that markets are becoming more optimistic about the US economy and reaching the start of Federal Reserve interest rate cuts without significant deterioration in economic conditions. On Tuesday, markets started pricing in a 100% chance that the Fed will cut interest rates by the end of its September meeting.
The Bank of America survey also found that 87% of fund managers expect lower rates, 81% foresee a steeper yield curve, and 62% predict a minimum of three cuts by the Fed over the next 12 months.
The recent rotation into some unwanted stock sectors was also evident, with equity investors overweight utilities for the first time since February 2009, the survey showed. Investor positions remain overweight stocks and underweight bonds. The survey also showed that exposure to European shares fell by the most in two years.
Exposure to EU shares saw the largest fall since July 2022, while investor sentiment towards US shares improved, reaching a five-month high. Fund managers also held their largest underweight position in real estate investment trusts (REITs) since January 2009.
Additionally, 71% of fund managers said the “Long Magnificent 7” – the dominant US tech stocks – remains the most crowded trade. This marks the 16th month fund managers have held that view over those stocks. Investor sentiment about an AI bubble remains divided, with 45% believing AI stocks are in a bubble, up from 43% in June.