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Bank of America European Fund Manager Survey: Tighter money looms

A plurality of survey participants see central bank tightening as the biggest risk for markets, overtaking inflation...

Central bank tightening looms even as inflation risks fade
Inflation concerns are fading, with a net 30% of survey respondents globally as well as in Europe expecting lower inflation over the coming year, while in March 90%+ expected higher inflation. The proportion of investors seeing inflation as the key downside risk for markets has dropped from 48% in October to 22%. Despite the more sanguine inflation outlook, investors expect central banks to start tightening policy, with a net 59% of respondents regarding global monetary policy as too stimulative (close to the peak level reached in 2004) and 42% seeing central bank tightening as the biggest tail-risk for markets, making it the most frequently cited risk factor, overtaking inflation concerns.
Covid concerns return, but Omicron not seen as game changer
With this month's survey period starting a week after the emergence of the Omicron variant, 15% of investors see Covid as the biggest tail risk, up from a pandemic-low of 3% in October. 38% think the pandemic is here to stay, causing moderate disruptions to activity, up from 17% in November. Yet, 50% of respondents regard the virus threat as contained, due to the fact that hospitalizations and deaths are set to remain low.

Growth expectations stabilize
The improvement in growth expectations continues, with a net 37% of respondents expecting a stronger European economy over the next year, up 13ppts over the past two months (well below the peak of 94% in March). Investor sentiment on China has also improved, with 45% of investors expecting policy easing in China to support a global growth rebound (up from 30% last month). Only 12% think the debt crisis in China's property sector will intensify. A vast majority of respondents, at 67%, believes that supply constraints have been a significant driver behind the recent global growth slowdown, but that they will unwind slowly, translating into only a small boost to growth going forward.

Equity bullishness is alive and well
28% of respondents expect the rally in European equities to continue until at least Q4 next year, while only 10% think equities have already peaked and 15% expect it to peak in Q1. A large majority of 62% see 5-10% upside for European equities next year, while 12% expect more than 10% upside. A net 20% of investors regard the market as undervalued, the largest proportion since March 2019. Some 42% sees reducing equity exposure too early as the biggest risk to their portfolio. That said, a growing share of 23% think the key risk is reducing equity exposure too late, up from 9% in November.

Still bullish on cyclicals and financials
43% of investors see moderate further upside for cyclicals versus defensives, while 28% see 10%+ upside. Investors remain bullish on banks, with 78% seeing them either as an attractive vehicle to position for higher rates or as a beneficiary of the last leg of the recovery. Tech, insurance and banks remain the top-3 overweights, with tech taking the top spot from banks. Telecoms, real estate and food & beverages are the top-3 underweights.