Bank of America Survey: The biggest tail risk at the moment is the central bank's turn to eagle

Global fund managers, who expect inflation (rather than economic growth) to decline this year, are betting on commodities and stock market booms at record levels, according to the Bank of America's latest survey.

The monthly fund manager survey was conducted between January 7 and January 13, 2022, with a total of 329 fund managers interviewed and $1.1 trillion in assets under management.

According to the monthly survey, net overweight positions in commodities rose to all-time highs in January. Meanwhile, the net over-allocation difference between equities and bonds was its biggest since January 2011 as low-allocation positions in equities fell to all-time lows. Net overweight positions in technology stocks fell 1 percent to their lowest level since December 2008.

The findings show that optimism in the stock market remains high despite hints that the Fed will tighten policy more aggressively to curb price spikes. Instead of attracting investors to buy bonds, the prospect of rising interest rates has triggered a rotation within the stock market — from higher valuation sectors like tech to cheaper sectors that would benefit from economic growth.

Bank of America analysts, represented by Michael Hartnett, wrote in the report:

"Hopes of a reopening of the globe overshadow fears of a Fed rate hike."

They said market participants are moving from credit to commodities, from growth stocks to value stocks, and from technology to bank stocks.

These reactions contradict the views of Bank of America analysts themselves. They have long believed that the stock market will pull back sharply as interest rates rise and economic growth slows. They say they "are still stagflation bear marketists."

The survey shows that in the eyes of fund managers, the biggest tail risk is the central bank turning eagle, followed by inflation, asset bubbles, global growth panics and the resurgence of the new crown epidemic. Only 6% see a resurgence as the biggest risk.

The most crowded trades include going long on tech stocks, shorting U.S. Treasuries, going long ESG, and going long bitcoin.

In addition, other highlights of the survey are:

Of the respondents to the survey, only 36 percent believe inflation is permanent, while 56 percent believe it is temporary. 48% expect the CPI to decline, the highest percentage since February 2009.

The net allocation of bank stocks increased to 41%, close to the record high set in October 2017.

Only 7 of the 100 investors believe there will be a recession in the next 12 months.

50% of respondents believe value stocks will outperform growth stocks.

Investors expect the Fed to raise rates three times in 2022 and the yield curve to flatten.

This article originates from Golden Ten Data