Only 44% of European fund managers surveyed by the Bank of America expect the European economy to further improve over the coming 12 months. This is the lowest proportion since last June, and a sharp decline from 80% last month and a peak of 94% in March.
The latest insights from the Bank of America’s European Fund Manager Survey for August suggests the cooling growth expectations are partly due to rising covid concerns, with 19% of investors citing the Delta variant as the biggest tail risk (up from 9% in May), closely behind inflation concerns and worries about a taper tantrum (at 20% and 22%, respectively).
Some 56% of respondents expect the macro cycle to peak this year, up from 40% last month.
The Bank of America agrees with this sentiment, seeing little scope for a renewed growth acceleration, given the advanced stage of reopening and clear signs of a loss in US growth momentum.
Positive on European equities
Despite the cooling response to the European economy, 51% of respondents expect the equity rally to continue until next year (the same proportion as last month), although 40% now think it will end in Q4 (up from 20% last month).
Less than 5% of respondents envisage downside for European equities by year-end, with a majority of respondents expecting further single-digit upside from current levels, following the 70% rally since last March.
Many survey participants sees reducing equity exposure too early as the biggest risk to their portfolio, while only 16% worry about not having enough defensive hedges.
Interestingly, 23% of investors say they are overweight cash, the highest proportion in a year.
A majority of respondents (70%) think the reflation trade has further to go (up from 64% in July), with only 11% saying it has run its course (down from 16% in July). Two-thirds (67%) of survey participants regard European banks as an attractive vehicle to position for rising bond yields, while less than 20% regard banks as unattractive.
Banks and insurance now rank among the top three European sector overweights, surpassed only by technology.
The defensive utilities, telecoms and real estate sectors remain the biggest consensus underweights.
In terms of countries, Germany is the most preferred equity market, followed by Italy, while the defensive bond-proxy Switzerland remains the most disliked.
Investor sentiment
Tancredi Cordero, chief executive of Kuros Associates thinks these statistics have to be taken with a big pinch of salt.
“Investor sentiment is even more volatile than actual market movement. I would infer that the more bearish stance generally displayed by fund managers in the latest BofA survey is the by-product of recent bad news/events campaigning in the press: China’s regulatory crackdown, Fed’s tapering words, Taliban’s victory against America and new spikes in covid cases and hospitalisations.
“European stocks and economies are very sensitive to all the above. No wonder investor sentiment has taken a hit. However, I agree that European and British equities are poised to continue doing well in the coming months and well into 2022.”
He adds: “Of course, what matters most is what central banks will do in terms of quantitative easing. As long as they continue printing money markets will go up or at worst sideways, however, we know that they can’t buy at the current rate forever and certainly not against improving economic data. Will inflation be the trigger to stop buying bonds? Probably. Will they stop buying abruptly instead of using a gentle progression so for us to live another taper tantrum? I doubt it.”
