Bank of America’s latest survey reveals a shift in investor sentiment towards cautious optimism, with expectations of a soft landing for the global economy. The survey, released on 16 July 2024, included 242 fund managers with a total of $632bn in assets under management. It found that while investors are increasingly cautious about global economic growth prospects, they remain optimistic about certain market dynamics.

Regional variances

Investors have become more sceptical about global growth prospects, found Bank of America, with a net 27% anticipating a slowdown over the next year. This sentiment marks a significant shift from earlier optimism in April 2024, particularly driven by concerns over tightening monetary policies in the United States. Specifically, 78% of respondents foresee a slowdown in the US economy, while 38% and 30% predict similar trends in China and the euro area, respectively. Despite these concerns, a substantial 68% still anticipate a soft landing for the global economy, reflecting cautious optimism amidst economic uncertainties.

Fading inflation

A notable 62% of survey participants expect global inflation to decrease over the next 12 months, paralleled by a similar sentiment of 70% for Europe. This expectation, combined with forecasts of weakening economic growth, has led a near-record 87% to anticipate lower short-term interest rates. Among respondents, 40% view fading inflation as the primary driver shaping market dynamics in the months ahead, underscoring a shift in economic expectations.

European equities

Despite broader economic concerns, 55% of respondents project a 5% or higher upside for European equities over the coming year. This optimism is underpinned by expectations of declining interest rates amid fading inflationary pressures and robust corporate earnings. Conversely, only 13% foresee downside risks for the market. Investors remain cautious about prematurely reducing equity exposure, with 33% highlighting this as a primary risk, followed by 25% concerned about inadequate defensive hedges.

Sectoral preferences

Survey findings indicate a preference for defensive sectors, with healthcare, utilities and technology emerging as top choices among investors. In contrast, cyclicals such as autos, retail and media are viewed less favourably, with 40% expecting cyclicals to outperform, while 23% anticipate underperformance. Quality stocks are anticipated to outperform lower-quality counterparts, with 53% of respondents expressing confidence in this trend. However, sentiments towards value stocks have turned more negative, with 33% expecting them to underperform growth stocks, a significant increase from previous months.

Banks

Within the banking sector, traditionally considered a value sector, 53% of respondents predict underperformance due to declining bond yields and widening credit spreads. This contrasts with a diminishing 30% who believe in continued outperformance, indicating a cooling sentiment towards banks compared to earlier in the year.

Andreas Bruckner, European equity strategist at BofA global research, commented on the findings, “Investors turn more doubtful on the global growth outlook, expecting global growth to soften, driven by the US, but not to be weak outright, with 68% calling for a soft landing.” Bruckner added, “Investors remain bullish on European equities, with a majority seeing see 5%+ upside for the market with a preference for quality, while sentiment on banks is cooling.”