Inflation overtakes Covid as key fund manager concern

Respondents to the monthly BoA Global Fund Manager Survey say that the pandemic is no longer their top tail-risk. It has been replaced by worries about rising prices.
Inflation overtakes Covid as key fund manager concern

Investors across the world are becoming increasingly positive about the outlook for the global economy and see Covid-19 subsiding as a global concern, with inflation instead rising to the uppermost of their worries, according to the latest monthly BoA Global Fund Manager Survey*.

The anticipation of a strong economic recovery among respondents stood at historic highs, with 91% of respondents expecting a stronger recovery, and 48% anticipating a V-shaped recovery (versus about 40% for a W or U-shaped improvement).

For the first time since February 2020, Covid-19 was not the top tail risk of survey respondents. Instead, the expectation of a rapid economic recovery also fed investor concerns about inflation and taper tantrums, both of which indicate a belief that prices will begin to rise and central banks may struggle to adjust their interest rates to cope.

Indeed, 93% of respondents said they believe that higher prices will emerge over the next 12 months, a historical high.

Hand in hand with anticipation of inflation was a belief that rates will also rise. All-told, 49% of investors said they anticipate higher short-term rates (up from 33% in February). That expectation comes despite BoA noting that, according to respondents, “the first Fed[eral Reserve] hike is not expected until February 2023”.

This outlook has not yet let to a major shift in monthly assets. Fund managers said they slightly increased their cash from 3.8% to 4%, a still low historical level, while allocations to commodities stand at an all-time high (28%) and stock allocations are also very overweight.

When asked what level of yield expansion on the 10-year Treasury could cause an equity market price correction (higher Treasury yields tend to lead some investors to shift funds from equities to take advantage), respondents said it would need to be at least 2%, adding that these bonds would become attractive versus stocks if yields hit 2.5%. There is still some way to go; the 10-year Treasury yield on the morning of Tuesday (March 16) was trading at a yield of 1.601%.


In terms of sectoral investing priorities, the survey respondents said they have shifted from an early year emphasis on growth towards value. They are particularly looking to cyclical areas that could benefit from an expanding economy, and highlighted commodities, industrials and banks as among their most appealing picks.

Amid this generally bullish outlook, tech stocks continue to be the most overvalued area of long stock investments, followed by Bitcoin and ESG allocations. That said, the overweight on technology has become its lowest level since January 2009.

Amid all this, most chief investment officer respondents (52%) said they want company leaders to increase their capital expenditure, while only 30% want corporate chief executives to strengthen their balance sheets – another sign of the desire for a vigorous economic rebound, following a difficult 2020.

And few believe that the US equity market has already hit a bubble in terms of valuation; just 15% said they believe the market is in a bubble, versus 55% who believe it remains in a late stage bull market. 

* A total of 220 respondents with a combined $630 billion in assets under management participated in the survey. Of this, 197 participants with $597 billion AUM responded to the Global Fund Manager Survey questions and 85 participants with $165 billion AUM responded to the Regional FMS questions.
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