Stagflation has become the consensus view of investors, according to Bank of America’s (BofA) monthly fund manager survey.
The proportion of investors expecting stagflation – defined as below-trend growth and above-trend inflation – over the next 12 months now stands at 92 percent, finds the research, which polled 272 individuals managing a collective $790 bn.
Just 7 percent predict what BofA analysts call ‘stagnation’: below-trend growth and below-trend inflation. No respondents believe markets will see a ‘goldilocks’ environment with above-trend growth and below-trend inflation.
The regular survey paints a gloomy economic picture for 2023: a net 73 percent of respondents expect the global economy to weaken in the next 12 months, while a net 77 percent say a recession is likely, the highest level since April 2020.
Amid the few positive notes, the proportion of investors expecting profits to deteriorate over the next year stands at a net 77 percent, down from a net 83 percent in October. Given the ‘uber-bearish’ sentiment, however, investor cash levels remain elevated at 6.2 percent.
Investors remain staunchly in risk-off mode given rising interest rates, sticky inflation and weakening economic indicators. This week, Target added to the gloom when it announced a big earnings miss in its third-quarter results.
‘In the latter weeks of the quarter, sales and profit trends softened meaningfully, with guests’ shopping behavior increasingly impacted by inflation, rising interest rates and economic uncertainty,’ says Brian Cornell, chairman and CEO of the retailer, in a statement.
The biggest tail risk for markets, according to BofA’s survey, is if inflation stays high, cited by 32 percent of respondents. That’s followed by worsening geopolitics, central banks staying hawkish and a deep global recession, each cited by 18 percent of respondents.
In this environment, most investors would like companies to use free cash flow to improve the balance sheet, reports BofA, with 55 percent selecting this option. Just 21 percent would like extra capital spending, while 17 percent would support increased buybacks.