Of the 220 respondents to the Bank of America’s (BofA) August Fund Manager Survey (FMS), nearly 1 in 2 (47 per cent) participants agreed that a weaker global economy is guaranteed over the next 12 months, with optimism about China dropping to its lowest level since May 2022.
Moreover, 19 per cent of FMA investors said they are taking lower-than-normal risk levels, up from just 1 per cent in July.
“Our broadest measure of FMS sentiment, based on cash levels, equity allocation, and economic growth expectations dropped to 3.7 from 5 last month,” the bank said.
In the face of market unease, investors are now net 8 per cent overweight in bonds, with allocations to this asset class increasing by 17 percentage points month-on-month.
“FMS investors are the most overweight bonds since December 2023,” BofA said.
Investors have also raised their cash allocations 12 percentage points over the last two months, marking the greatest two-monthly increase since September 2022, to a net 6 per cent overweight.
On the other hand, allocations to equities fell 22 percentage points month-on-month to an 11 per cent net overweight position – the biggest monthly drop since September 2022.
Allocations to Japanese equities, additionally, saw their largest one-month slip in more than eight years, from 7 per cent overweight to 9 per cent underweight.
Despite the surge in the Japanese yen in recent weeks, 63 per cent of FMS investors still think the yen is undervalued.
However, noting that core investor optimism is “shaken not stirred”, BofA said that expectations of a global soft landing remain unbowed, with the probability of a soft landing jumping from 68 per cent to 76 per cent.
“Core optimism of a ‘soft landing’ [remain] unchanged, but investors now expect a greater degree of Fed policy easing in the next 12 months will be required to achieve this outcome,” the bank said.
Namely, 60 per cent of FMS investors expect four or more rate cuts from the Federal Reserve over the next 12 months, with the first cut occurring at the September Federal Open Market Committee meeting, according to 94 per cent of respondents.
At the same time, the probability of a US recession (39 per cent up from 18 per cent in July) has replaced geopolitical conflict (25 per cent) as the primary tail risk.
