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Sep 14, 2022

Gloomy economic outlook sees investors boost cash levels, finds BofA survey

Around two thirds of respondents now say recession is likely

The outlook for the global economy ‘remains bleak’, according to September’s fund manager survey from Bank of America (BofA).

A net 72 percent of respondents expect a weaker economy over the next 12 months, up from 67 percent in the August survey, and close to the record high witnessed in July this year.

Meanwhile, a net 92 percent of investors predict global profits will decline during the next year and 68 percent say a recession is likely – the highest level since May 2020.

‘As recession concerns strengthen, investors reverted to cash, increasing average cash balances to 6.1 percent,’ note BofA analysts. This marks the highest cash level since October 2001 and is ‘well above’ the long-term average of 4.8 percent, they add.

Investors also pushed higher their expectations for where the Federal Reserve target funds rate will peak. In September, the majority of respondents say the funds rate will hit 4 percent-4.25 percent this cycle, compared with 3.5 percent-3.75 percent in August.

Commenting on the biggest tail risks for markets, BofA survey respondents say the top concern is that inflation stays high (cited by 36 percent), followed by hawkish actions from central banks (20 percent), geopolitics (17 percent) and a global recession (also 17 percent).

Inflation surprise

This month’s survey polled 212 participants with a collective $616 bn of assets under management. The research took place between September 2 and September 8, closing before this week’s hot US inflation data, which saw the S&P 500 fall more than 4 percent.

On Tuesday, data showed that the US consumer price index rose by 0.1 percent between July and August, compared with an expected decline of 0.1 percent. Core inflation, which removes more volatile items such as food and energy, also climbed more than expected.

The higher-than-anticipated inflation reading places pressure on the Fed to keep rates higher for longer. Some investors were hoping inflation had rolled over, potentially bringing forward a Fed ‘pivot’ toward softer monetary policy.

‘Nerves are frayed on financial markets amid worries that inflation is still proving very hot to handle for the US Federal Reserve,’ says Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, in a statement. ‘Investors have turned highly skittish again, retreating further from risky assets, and sending stocks sliding on Wall Street.’