Investors reduced exposure to risk assets in an economic climate described as “dire,” according to a July Bank of America survey of 259 chief investment officers, asset allocators, and portfolio managers.
Allocation to stocks fell to 2008 levels, and exposure to cash jumped to a 20-year high, the monthly survey of fund managers revealed. 58% of respondents said they were reducing risk. The participants, who had $722 billion under management in the week ending July 15, cited inflation, global recession, hawkish central banks, and systemic credit events as chief threats.
But more investors are thinking that inflation will improve over the next year, according to the survey. As they steered clear of risk assets this year, the S&P Index entered a bear market and European stocks suffered their worst six-month decline since 2008. Now, with some optimism about future inflation, uncertainty remains, particularly given a potential energy crisis in Europe, Bloomberg reported.
“Second half 2022 fundamentals are poor but sentiment says stocks/credit rally in coming weeks,” BofA strategists wrote in the poll.
How long a rally would last is anyone’s guess. Strategists for Morgan Stanley and Goldman Sachs see high pressure from inflation and the possibility of a recession as factors that could squelch anything enduring, according to Bloomberg. Investors may start to move into growth stocks and look into cheap cyclicals such as autos, Credit Suisse strategists said in a note.
The July survey also reported that investors increased their exposure to bonds, staples, healthcare, and utilities, and decreased exposure to equities, the Eurozone, materials, and banks between June 15 and July 15. Also, it revealed that long U.S. dollar, long oil and commodities, long ESG assets, long cash, and short U.S. Treasuries were the most crowded trades during the time period.