Fears of a credit crunch had driven up bond allocation to a net 10% overweight
Author of the article:
Bloomberg News
Sagarika Jaisinghani
Published Apr 18, 2023 • 2 minute read
Stock market information at the Nasdaq MarketSite in New York. Photo by Michael Nagle/Bloomberg Investor allocation to equities relative to bonds has dropped to its lowest level since the global financial crisis as worries about a recession take hold, according to Bank of America Corp.’s global fund manager survey.
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Access articles from across Canada with one account. Share your thoughts and join the conversation in the comments. Enjoy additional articles per month. Get email updates from your favourite authors. In the most bearish survey of this year — the first after banking turmoil roiled markets last month — investors indicated that fears of a credit crunch had driven up bond allocation to a net 10 per cent overweight, the highest since March 2009. A net 63 per cent of participants now expect a weaker economy, the most pessimistic reading since December 2022.
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Still, the bearish turn in sentiment is a contrarian signal for risk assets, strategist Michael Hartnett said in the note. If “consensus lust for recession” isn’t satisfied in the second quarter, the “pain trade” would be a rally in bond yields and bank stocks, he said.
Hartnett was correctly bearish through last year, warning that growth fears would fuel a stock exodus.
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Article content Stocks in the United States have bounced back from last month’s lows that were sparked by the collapse of some regional U.S. lenders, including Silicon Valley Bank. Still, the rally has moderated this month as data show a softening in the labour market, fuelling worries that the economy could contract later this year.
A credit crunch and a global recession are seen as the biggest tail risks to markets, followed by high inflation that keeps central banks hawkish. A systemic credit event and worsening geopolitics are also among the risks, according to the survey, which ran between April 6 to 13 and canvassed 249 participants with US$641 billion in assets under management.
Other highlights from the survey include:
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Article content About 84 per cent of respondents see a pullback in global consumer price inflation, while 58 per cent predict lower short-term rates, the most since November 2008.
About 80 per cent expect the U.S. debt ceiling to be raised by September.
Cash allocation has remained above five per cent for 17 consecutive months — second only to the 32-month dot-com bear market.
A net 49 per cent of investors expect investment-grade bonds to outperform high-yield bonds over the next 12 months — the most on record.
U.S./European commercial real estate is seen as the most likely source of a credit event, followed by U.S. shadow banking, U.S. corporate debt and a U.S. Treasury debt downgrade
Inverted yield curve with side order of (possible) recession Banking crisis looks short but lessons must be more enduring TSX fights to keep stock listings from bypassing Canada for U.S. Most crowded trades: long big tech stocks (30 per cent), short U.S. banks (18 per cent), long China equities (13 per cent), short real estate investment trusts (12 per cent), long European equities (11 per cent), long U.S. dollar (five per cent).
— With assistance from Michael Msika.
Bloomberg.com