There is currently a “dire level of investor pessimism” among fund managers after the opening six months of 2022 in which markets sold off and economic fundamentals weakened, the latest Bank of America Global Fund Manager Survey has found. 
The survey, which polled 259 fund managers running a total of $722bn between 8 and 15 July, makes for a downbeat read, showing that investors are growing increasingly negative on the economic outlook and corporate profitability.
At the same time, investors have been dropping their equity allocations and piling into cash.
Global growth optimism (shown in the chart below by the dark blue line) among the survey’s respondents has fallen to an all-time low: a net 79% of fund managers expect the global economy to weaken in the coming 12 months (up from a balance of 73% last month).
Net % of fund managers expecting a stronger economy
Source: Bank of America Global Fund Manager Survey – Jul 2022
Most fund managers now expect the global economy to enter recession. A record high of 90% of investors see a period of stagflation – or low growth combined with high inflation – ahead of us; just 1% are holding out hopes of a ‘Goldilocks’ scenario of above-trend growth and below-trend inflation.
The light blue line in the above chart shows the net percentage of fund managers who are overweight stocks at the moment. The allocation to equities versus cash and bonds has fallen to lows not seen since the global financial crisis.
During July, managers have added to overweights in defensive sectors (utilities, consumer staples and healthcare) while going underweight late cyclicals (banks, energy and materials). They had been overweight late cyclicals for most of 2022, but have pulled away from these areas as the economic outlook starts to sour.
Net % of fund managers taking higher than normal risk levels
Source: Bank of America Global Fund Manager Survey – Jul 2022
Indeed, a net 58% of asset allocators said they are taking lower than normal risk levels within their portfolios, which is a record low and is even more pessimistic than their stance during the global financial crisis.
Linked to this, the average cash balance has climbed from 5.6% last month to 6.1% today – which is the highest since October 2001. A net 50% of fund managers are now overweight cash, which is two standard deviations above its long-term average.
When it comes to what fund managers want companies to do with their cash, most want businesses to strengthen their balance sheets by reducing debt, rather than increase capex spending or return cash to shareholders.
This comes as the percentage of investors who expect company profits to deteriorate also reaches an all-time high, surpassing the highs of the global financial crisis and the Covid pandemic.
What fund managers consider to be the biggest tail risk
Source: Bank of America Global Fund Manager Survey – Jul 2022
The final chart shows the issues that are worrying investors the most in July, topped by persistently high inflation. One-third of managers said this is biggest risk in the market today.
That said, there is a growing number of investors expecting inflation to be lower in the next year, which would mean interest rates could stay lower than they might have.