Fund managers are a smart bunch. Often very well remunerated to buy and sell financial securities, they are responsible for implementing a fund’s strategy and managing its trading activities. Ultimately, they oversee our mutual and pension funds and make important investment decisions that may affect our future life choices.
So, when one of the biggest US investment banks surveys more than 200 global fund managers every month, it pays to listen.
The latest report of these investors, who manage close to $600 billion in assets, finds that for the first time in more than a year, the Covid-19 pandemic is no longer the biggest risk for global financial markets. Every month since last February, those answering one of the longest-running polls of Wall Street investors highlighted the pandemic as their number one concern.
Instead, higher-than-expected inflation is weighing more heavily on their minds now, according to Bank of America's February Global Fud Manager Survey. Investors are primarily concerned that the economic recovery may unleash a surge of price growth that could be hard to contain.
And it is easy to see why they might think so. The return to normality has been boosted by unprecedented levels of stimulus from both central banks and governments.
Nowhere is this more pronounced than in the US, where President Joe Biden has just signed into law a new $1.9 trillion rescue package, which has prompted many economists to raise their growth forecasts for the world’s biggest economy.
Let us not forget this comes on top of the $900 billion raft of spending that the previous Trump administration unveiled in its dying days.
There might also be another bump to growth in the form of a potential $2bn infrastructure spending plan touted by the president in his election campaign.
It is notable that in previous surveys, fund managers had been more optimistic about a “goldilocks” scenario, where the world economy is not expanding or contracting by too much. In other words, above-trend growth paired with below-trend inflation.
But with more stimulus cheques landing on the doorsteps of US households earning less than $75,000 a year, a record number of investors now anticipate more rapid price increases in the coming year. This has sent shockwaves through the bond markets because inflation is the enemy of fixed-income securities.
Yields, which rise as the price falls, have popped higher this year with those on the US 10-year Treasury bond, one of the world’s most closely watched interest rates, rising past 1.6 per cent from 0.9 per cent at the start of 2021. This highlights the extent to which investors have sold debt and are demanding a premium for lending to Uncle Sam.
In many ways, this jump in inflation, as long as it doesn’t go too far, may not be a bad thing as it is certainly a way out of the massive debts that governments and central banks have run up during both the post-financial crisis period and the pandemic.
Perhaps the more pertinent question for money managers if the inflation genie has been let out of the bottle is whether the market reaction is a short-term response to extraordinary stimulus and the re-opening of the economy? Or, is it more deep-rooted and long-term, which means central banks may need to think about how they control it?
The investor survey also underlined the enduring belief in a positive outlook and bullish stock markets, with nearly 90 per cent of respondents expecting company profits to grow. That is more than in the dot-com boom in the early 2000s and late 2009, when the global economy emerged from the global financial crisis.
With major global stock market indices currently trading well above long-term averages, the concern is that there is plenty of room for setbacks if company earnings start to disappoint.
Investors have put their money where their mouths are, taking their cash levels down to the lowest since March 2013. This was just before the US Federal Reserve sparked the infamous market “tantrum” by signalling its intent to wind down some of its 2008 crisis measures.
As we said at the start, fund managers are a shrewd bunch, but sometimes even the crowd can get it wrong. The authors of the survey admit the value of its use as a contrarian signal, that is to say, it can often pay to do the opposite of the consensus.
Hussein Sayed is the chief market strategist at FXTM.