Investor Gloom Pushes Risk Appetite to Record Low, Says Bank of America Survey

A screen at the New York Stock Exchange shows a lot of red, indicating widespread stock market losses, in New York on June 16, 2022. (AP Photo/Seth Wenig)

Amid a declining economic outlook, investor growth and profit expectations have hit an all-time low, according to the Bank of America global fund manager survey for July.

The closely watched BOA survey, which was released on July 19, polled 259 investors overseeing $722 billion in assets. The survey saw risk assets falling to levels not seen since the 2008 global financial crisis, due to a massive drop in optimism.

About 58 percent of fund managers said they are taking lower than normal risks at this time.

Negative outlooks on future corporate earnings have reached 90 percent, amid a feeling that while inflation is expected to come down, stagflation will persist for the time being.

The survey noted that the fear of recession has reached its highest level since May 2020, during the pandemic.

Global economic growth according to data is rapidly cooling, due to soaring inflation and the interest rate hikes meant to control it.

Although some are hopeful that inflation could be nearing a peak in the United States, sentiment remains subdued with risks, as an economic downturn remains high.

Biggest ‘Tail Risk’

Fund managers expect the Federal Reserve to increase basis points by 150 this year for 10-year borrowing costs, but do expect a pivot until the PCE price index peaks and falls below 4 percent.

The core PCE price index currently stands at 4.7 percent for its most recent reading.

Participants said that the biggest “tail risk” is high inflation and an overaction by the central banks in trying too hard to bring down price pressures, followed by a global recession.

Investors are becoming bullish on cash and bearish on equities, with the proportion of cash in portfolios rising to above 6 percent, the highest since 2001.

Meanwhile, investment allocation in stocks plunged to levels not seen in October 2008, during the great financial crisis, due to a “dire level of investor pessimism.”

However, the fact that investor sentiment is so low at this point, could set markets up for a relief rally in the weeks ahead, according to the survey.

BOA strategists reported that their custom market indicator remains “max bearish,” a sign that there may be a short-term rally.

“Second half 2022 fundamentals poor but sentiment says stocks/credit rally in coming weeks,” noted Michael Hartnett, Bank of America’s chief investment strategist.

Lower Interest Rates for 2023?

Most investors according to the poll, are betting that inflation will be lower next year, meaning that there will be lower interest rates.

The survey’s findings also highlight this year’s flight from risk assets, which has sent the S&P 500 Index into a bear market and led European stocks to their worst six-month drop since 2008.

About 79 percent of respondents are expecting a weaker economy over the next year, the worst reading since the survey began in 1995.

Investors are most bearish on the Euro and Japan equity regions but are bullish on the dollar and pound zones.

In addition to the big cash positions, investors are long on defensive stocks and commodities like oil, while taking short positions in stocks, European assets, U.S. treasuries, and discretionary shares in particular.

A looming energy crisis in Europe also adds to the uncertainty.

However, investors are no longer expecting higher bond yields, while long-term rate expectations are at 3-year lows.

The poll was taken from July 8-15, just after Wall Street posted its worst first-half decline since 1970, with a decline of almost 20 percent since the start of the year.

Reuters has contributed to this report.