(Bloomberg) -- Investors are fleeing equities en masse amid the specter of a recession, with allocations to stocks at record lows and cash exposure at all-time highs, a Bank of America Corp. survey showed.
A historically high 52% of respondents said they are underweight equities, while 62% are overweight cash, according to the bank’s global fund manager survey, which included 212 participants with $616 billion under management in the week through Sept. 8.
As concerns over the economy escalate, the number of investors expecting a recession has reached the highest since May 2020, strategists led by Michael Hartnett wrote in a note on Tuesday. Sentiment is “super bearish,” with the energy crisis further weighing on risk appetite, they said. A net 42% of global investors are underweight European equities, the largest such position on record.
The survey showed the market’s grim mood even before Tuesday’s report on US inflation, which ran hotter than estimates in August and cemented traders’ bets on a 75 basis-point rate hike by the Federal Reserve next week. US stock futures fell on the news with contracts on the S&P 500 dropping by more than 2%.
Read more: US Inflation Tops Forecasts, Cementing Odds of Big Fed Hike
Global stocks have had a roller-coaster ride in the past few months. Declines have been driven by fears that central banks will remain hawkish for longer and tip the economy into a recession, while rallies have been fueled by low investor positioning and optimism around peaking US inflation.
Strategists at top banks including Deutsche Bank AG and JPMorgan Chase & Co. say bleak investor sentiment -- often a contrarian indicator for a stock rally -- is likely to drive equities higher into the year-end.
Inflation Test
Bank of America’s Hartnett sees the extent of depressed sentiment and better-than-feared macroeconomic data boosting the S&P 500 to 4,300 points -- nearly 5% above current levels. But he expects the index to fall back from that level, and remains “fundamentally and patiently bearish.”
The outlook for corporate earnings is also deteriorating. A net 92% of participants in the Bank of America survey now expect profits to decline in the next year, while the number of investors taking higher-than-normal risk has fallen to a record low.
Persistently high inflation is seen as the biggest tail risk, followed by hawkish central banks, geopolitics and a global recession. Only 1% of participants see a resurgence in the Covid-19 pandemic as a tail risk.
Other survey highlights include:
- The most crowded trades are long US dollar, long oil and commodities, long ESG assets, short US Treasuries, long growth stocks and long cash
- A net 79% of participants see slower inflation in the next 12 months, while 36% say the Fed will stop hiking rates in the second quarter of 2023
- Monetary risk lingers, according to a near record share of investors, while rates are the most volatile since the global financial crisis
- Europe’s energy crisis will likely push the regional economy into a recession, almost 70% of participants say, while fewer believe an energy price cap announcement to be the most likely outcome
- Relative to the past 10 years, investors are long cash, defensives and energy, while being underweight equities, the euro zone, emerging markets and cyclicals
--With assistance from Farah Elbahrawy and Michael Msika.
