Fund managers dash for cash amid inflation and China concerns

The closely watched global fund manager survey reveals plenty of caution and concerns over inflation. 

The professionals are the “least bullish” they have been since last October, having upped cash levels to a 12-month high, according to the latest monthly Bank of America (BofA) fund manager survey.

Driving the increasing levels of bearishness are global growth expectations turning negative for the first time since last April, amid concerns over higher inflation being here to stay and pessimism over China.  

Inflation was out in front as the clear tailwind risk for markets, accounting for just under half of the vote from the professionals (48%). China was the next biggest concern, cited by 23% of respondents.

This morning, it was reported that UK inflation in September had slightly dipped from the previous month, falling from 3.2% to 3.1%. But inflation is expected to rise further in the coming months, with the Bank of England forecasting that it will hit 4% by the end of the year.

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The 380 professionals polled, who oversee more than a $1 trillion in assets under management, have responded to likely interest rate rises in the coming months to combat higher inflation by reducing their allocations to bonds to an all-time low.

Overall, it is clear that investors are keeping a watchful eye on whether the rises in the cost of living prove to be transient or more persistent. But, even if it proves to be a temporary phenomenon, markets are expecting an interest rate rise to occur to bring inflation back down towards the Bank of England’s 2% target.

Also of note was the banking sector hitting its highest overweight level since mid-2018. When interest rates rise from their historic low levels, banks are poised to benefit as it should help improve their profit margins.

Oliver Blackbourn, a multi-asset portfolio manager at Janus Henderson Investors, says that “markets have listened to the repeated warnings about imminent hikes and are now pricing for 1% interest rates by mid-2022, and a peak close to 1.25% from late 2022”.

He adds:“It is easy to see why the Bank of England expects inflation to be above 4% in the final quarter of the year. While these factors can be classified as transient, the Bank of England is clearly finding it harder to ignore the pressures on underlying inflation from elevated wage growth and markets which are pricing a sustained overshoot of the 2% target over the next decade.”

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Despite greater caution and volatility ticking up over the past couple of weeks, the BofA survey notes that equities remained firmly in favour, with exposure to US and Japan equities increased since last month’s survey. Closer to home, the pros are still overweight the UK and Europe, but reductions were made.

The three most-crowed trades are long tech, long ESG, and being short (seeking to profit from share price declines) in China and the emerging markets.

Another headwind keeping investors on their toes is the prospect of the Federal Reserve beginning the process of unwinding its stimulus programme, so-called tapering (which has helped prop up asset prices, including stock markets).

In addition, as the latest BofA survey acknowledges, China is giving investors plenty of jitters. Some are questioning whether the regulatory crackdowns in recent months and the Evergrande (SEHK:3333) crisis has made the country too risky to invest in.  

Luca Paolini, chief strategist at Pictet Asset Management, notes: “Expectations for tighter monetary policy are intensifying, but higher interest rates are not the only concern for equity markets. China’s strong recovery from the pandemic is now at risk as Beijing battles to avoid the collapse of its most-indebted property company Evergrande.”