Unsurprisingly, big global investors have abandoned stocks, found more cash, played it safe by going long in oil (and some other commodities) and hunkered with the rest of the bears down in the wake of the Putin-driven Russian invasion of Ukraine.
The March survey of global investors from Bank of America showed a dramatic turnaround in sentiment from February when a Russian invasion of Ukraine ranked low on the list of possible hurdles for markets and the most notable part of the survey was the lowest level of interest by managers in tech stocks since 2006.
February saw the main risks identified in the survey by managers were hawkish central banks, inflation and asset bubbles were the top three market concerns, only 30% of investors expect an equity bear market in 2022. Russia-Ukraine tensions is the fifth biggest “tail risk” for markets.
Now Russia Ukraine is top of the pops, along with all the things that flow from the February 28 invasion – higher inflation, trade sanctions and the impact on commodity prices (and inflation), financial stability and weakening share markets.
As a result big global investors are more concerned about the outlook for global growth than at any time since the GFC in 2008, and cash holdings are at a two-year high.
Cash levels among investors rose to nearly 6% (from 5.3% in February) while allocations to commodities soared to a record 33%. Hedge funds net exposure to stock markets is at its lowest level since April 2020, according to the survey.
As a result of the invasion (and the subsidiary boost to inflation) most of the investors managing about $US1 trillion in assets polled between March 4 and 10 now expect an equity bear market in 2022 and allocations to global shares have dropped to their lowest levels since May 2020 as the rebound from the March lows of the first pandemic was gathering pace.
The most crowded trade is long oil/commodities, with long technology stocks and long ESG investments ranked second and third respectively. Nearly half of the investors surveyed expect oil will produce the best returns in 2022.
The European edition of the monthly fund manager survey made for grim reading with investors slashing their growth outlook for Europe in response to Russia’s invasion of Ukraine.
A net 69% of respondents expect the European economy to weaken over the coming year, the highest share since 2011. The 81 percentage point swing from February’s net 12% who still expected to see growth marks the biggest month-on-month drop since BofA’s records began in 1994, the bank said in a commentary.
In response to the darkening growth outlook, about 61% of investors think the European market has peaked for this cycle, up from 22% in the previous edition of the survey.
Investors have also slightly increased their expectations for the number of rate hikes from the US Federal Reserve in 2022 even as liquidity conditions have worsened considerably to their lowest since the coronavirus pandemic hit financial markets in March and April 2020.
“This is notable because central banks have historically been much less inclined to hike when liquidity conditions are very poor,” BofA said.
A net 44% of European investors see European inflation rising over the next year, while last month 38% expected lower inflation.
At a global level, a net 5% of investors think global inflation will decline, down from a 13-year high of 56% last month, BofA pointed out.
And if the invasion wasn’t enough to confound markets, the surge in Covid Omicron cases in China is adding another unexpected dimension.
Covid didn’t rate a serious mention in the latest survey – it was all about the fallout from Russia’s Ukraine invasion. And no one seems to have given any thought to what is happening so far as Covid infections spreading across at least 28 Chinese provinces and major cities, such as Guangdong, Shenzhen and Shanghai.
That sounds like a big issue for the April survey.