Fund managers see geopolitical conflict as the biggest tail risk, supplanting inflation, and while overall pessimism has grown in July, the majority still foresee a soft landing, according to the results of Bank of America's latest Global Fund Manager Survey.
In the survey of 242 fund managers, who oversee a total of $632 billion in assets, the broadest measurement of sentiment — which is based on cash levels, economic growth expectations and equity allocations — fell to 4.9 in July from 6.0 in June. It is the first decline following three straight months of increases and the lowest since 4.6 in March. The broad measure of sentiment had bottomed out at 0.3 in October 2022.
Geopolitical conflict has replaced higher inflation as the No. 1 tail risk for global fund managers, while the number of managers concerned about an artificial intelligence bubble more than doubled.
When asked what the biggest tail risk is, 26% said geopolitical conflict (up from 22% in June), 22% said higher inflation (down from 32%), 18% said a U.S. recession/hard landing (up from 14%); 12%, an AI bubble (up from 5%); and 7%, a systemic credit event (down from 9%).
Reflecting higher pessimism, fund managers said equity allocations dropped to a net 33% overweight from a net 39% overweight in June. Despite the drop for the second month in a row, the number still represents a dramatic turnaround in sentiment during the past year. In June 2023, managers reported their equity allocations were a net 32% underweight.
Further reflecting the more pessimistic July, fund managers reported increasing cash levels to a net 1% underweight, up from a net 6% underweight in June.
Fund managers also expressed more pessimism regarding expectations of global growth over the next 12 months. A net 27% said in July they expect a weaker economy, up from a net 6% in June.
When asked when or if will be a recession in the U.S., 46% said there will be no recession within the next 18 months (down from 53% in June), while 24% said a recession will begin in the first half of 2025 (up from 16%), 16% say the second half of 2025 (up from 14%) and only 8% predict a recession before year-end 2024 (the same as in June).
Managers were surveyed between July 5 and July 11.
