To rephrase Oscar Wilde’s words, everyone is in the gutter and no one is looking at the stars.
Global fund managers have only turned more bearish on global growth and expect the US Federal Reserve to raise the Fed funds rate by 200 basis points more, disregarding recessionary forces at work in the country. One basis point is one-hundredth of a percentage point.
A survey of fund managers by Bank of America shows that cash levels have risen to the highest since the terror attacks on the twin towers in September 2001, more than two decades ago. More than half the fund managers surveyed said they were underweight on equities and overweight on cash in the latest survey.
Cash levels are now at 6.1 percent and the most extended fund managers’ position is long on the US dollar; a similar extent was seen in US tech companies in November 2020.
In other words, investors are choosing the dollar over every other asset to buy. This is also evident from the fact that the dollar index is testing fresh multi-decadal highs after the August retail inflation rate came in more than expected at 8.3 percent.
“A net 92 percent of FMS (fund managers’ survey) investors see profits declining in the next year, suggesting further deterioration ahead in the manufacturing PMI (Purchasing Managers Index) survey,” Bank of America said in a statement.
Expectations of a recession are very close to the highs seen when the coronavirus pandemic broke two years ago. What’s more, the proportion of investors who believe a recession has already set in has also increased.
The US Fed is scheduled to meet next week to vote on the Fed funds rate and the broad market consensus is that the central bank will announce a hike by 75 basis points more.
The peak Fed funds rate is seen at 4-4.25 percent by the second quarter of 2023, which would mean a cumulative 200 basis point hike from now to then. Investors see the odds of the Fed ending its rate hikes by then at low at 36 percent.
In short, rate hikes are expected to be faster and larger and when they will end is uncertain.
Pain from China
High and elevated inflation continues to be the biggest tail risk that fund managers see.
Besides the bleak global growth outlook, investors fear that China’s real estate would be a big source of trouble for investors. China’s real estate is currently going through a deep slowdown and the government, along with the central bank, has taken measures to limit the pain.
One of the reasons Beijing is cutting policy rates in contrast to the rest of the world is its troubled real estate market. This also means that China could add to the pain of a global growth slowdown.
Keyword: Investors hoard dollars on a bleak outlook, shows Bank of America survey>