Bank of America: Fund managers’ recession fears ‘a lot less bearish’ than 2022, but faith in U.S. stocks collapsing

The start of the new year appeared to show an improvement in investor sentiment, as stocks on Wall Street and Europe enjoyed gains in the first weeks of trading in the new year.

However, some fear remained due to uncertainty about corporate earnings and the economy, making trading more muted in recent days.

But while institutional investors are starting to feel more optimistic about the economy, their allocation to U.S. stocks has collapsed, Bank of America said Tuesday.

In the latest installment of its Global Fund Manager Survey, BofA surveyed 253 individuals who collectively manage $710 billion in assets.

The survey, conducted between January 6 and 12, asked fund managers to weigh in on how they expect the economy to play out in the near future – and how they are positioning their portfolios to weather potential economic and geopolitical storms.

Fund managers were still bearish, but “much less bearish” than in the last quarter of 2022, BofA analysts noted.

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Recession fears among major investors have hit a six-month low, thanks to optimism about China’s reopening after a painfully protracted strategy to end COVID.

Fund managers’ expectations for growth in China rose to a 17-year high, with 91% of respondents expecting a “full reopening” of the world’s second-largest economy in 2023.

Optimism about China has led to a decline in recession fears, with only 51% of fund managers saying they expect a weaker economy over the next 12 months. Recession fears peaked in November, when 77% of fund managers told BofA they expected a recession in the next year.

The bank’s strategists said in their note on the findings of the survey that previous peaks of fear of recession marked a turning point in asset prices.

Meanwhile, optimism about global economic growth reached a one-year high. Just 20% of fund managers said they see a deep global recession as the biggest tail risk for their portfolio, with persistently high inflation cited as the biggest tail risk by 34% of respondents.

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Fund managers are pulling out of US stocks

Last year, economic worries saw investors hoard money at the highest rate since 9/11 — but according to the latest BofA survey, money allocations among fund managers between December and January saw their biggest drop since mid-2020.

Despite allocating less of their portfolios to cash than at other times last year, fund managers were still overweight cash and bonds, the survey found, and still underweight global stocks.

When they invested in stocks, they steered towards emerging markets, eurozone stocks and shares of companies in the utilities and industrials sectors.

Money was drawn from US stocks, with allocations to US-listed companies falling to the lowest level since October 2005.

“The US equity allocation collapsed in January, leaving investors 39% net underweight. [the] most since October 2005 (52%),” BofA analysts wrote in a report on the survey findings.

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“The magnitude of the month-on-month increase in net underweight is very impressive,” they added. “John. In 2023, we recorded the largest monthly increase in the net underweight of US stocks to date.”

Fund managers have also been pulling out of healthcare and technology stocks, according to BofA’s January survey.

Looking longer, investors’ price targets for the S&P 500 averaged 3,900 points at the end of the year, according to BofA findings — down from the level at which it traded Tuesday morning.

Bitcoin, which like most cryptocurrencies suffered a terrible 2022, has been given an average price target of $15,500 for 2023. The digital asset was trading at around $21,150 on Tuesday.

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