The forecast of a soft landing is reflective of a majority of respondents — 61% — saying the Federal Reserve has finished its rate-hiking cycle, while one-third believe further rate increases will be coming. When asked when they believe the Fed will make its first rate cut, 43% believe it will do so in the first quarter of 2024, while 24% say the fourth quarter of 2023, and 14% said the second quarter of 2024. Remaining responses were for the second and third quarter of 2023 and "after 2024."
Also, managers continue to increase their bond allocations to 14% from 10% the month before, another significant hike after bond allocations were as low as 1% as recently as March. It is the highest allocation to bonds in the past 14 years, according to the survey.
Managers also hiked their allocations to equities to a net 24% underweight, up 5 percentage points from the previous month and the highest allocation yet seen in 2023. Allocations to cash also went up to a net 44% overweight from a net 43% in April and the highest allocation since November. It represents the third straight month of increases to cash allocations as managers seek liquidity after the start of the regional bank crisis.
Among asset classes seeing drops in allocation, commodities saw the largest drop to a net 2% overweight, a full 11 percentage points down from the previous month, while allocations to real estate dropped to a net 9% underweight, down 3 percentage points from the month before.
When asked to identify the biggest tail risk, 33% of managers identified a bank credit crunch and global recession as their primary concern (down from 35% in April), followed by high inflation keeping central banks hawkish at 29% (down from 34% in April), 15% said worsening geopolitics (up from 11%), 12% said a systemic credit event (down from 16%), and 8% said the current U.S. debt-ceiling debate, which was not on the list of potential tail risks in April.
Nearly half of managers — 49% — see the U.S. and European commercial real estate market as the most likely source for a systemic credit event, while 25% said U.S. shadow banking would be the most likely source, 8% said a U.S. Treasury debt downgrade, 5% said U.S. corporate debt, 3% said China real estate and 1% said European sovereign debt.
Also in the latest survey, when asked for their most crowded current trades, 30% said long, big technology stocks (same as in April); 22% said short, U.S. banks (up from 18% in April); 16%, short, U.S. dollar (not listed in April); 12% long, European equities (up from 11% in April); 7% long, Treasury bills (not listed in April); and 6%, long, China equities (down from 13%).
The survey was conducted between May 5 and May 11.
