A MONTHLY survey conducted by the leading US bank, the Bank of America, shows a very significant drop in expectations on global growth among large fund managers. The survey is always interesting to read and this time around it is for a couple of reasons.
This month, 242 large fund managers responded to the survey where global growth expectations dropped from minus 6 percent to minus 27 percent. It is the biggest month-on-month drop in two-and-a-half years. However, the majority of fund managers are at the same time pretty optimistic about the future. This is why the survey got extra attention: the findings should not work together.
One reason why this might not be a contradiction could be that the survey is old economy elastic and maybe even dominated by American fund managers. This fits well with a growing belief of a soft landing for the US economy; in other words, the “global growth view” could be less global and more of an old economic view as the whole of Asia proves to have a very different growth outlook. All in all, I regard the very dramatic drop in global growth expectations as much less dramatic due to the reasons I mentioned.
In addition, the continued comfortable feeling is also helped by coming rate cuts by central banks. The latter always calms nerves among fund managers, supporting the comfort. However, the ongoing comfortable feeling might build on a slightly weaker footing going forward, which I, of course, notice in my positive view of global financial markets. One could say that the coming interest rate cuts are already priced in all asset classes across financial markets, but the expected rate cuts also please the stock markets when they materialize.
It should not be neglected that a healthy macroeconomic environment supports a stock market, though that is fading in the US. In my view, this could easily require corporate earnings to be realized close to the expected, or at best beat expectations, which will not be the case forever.
The growth concern has, though, hit one region: the eurozone. The survey also discloses the biggest drop in allocations to eurozone stocks in the past two years. Interestingly, this move comes right after the chaotic political development following the elections to the EU parliament in June.
The fund managers’ more sensible reaction to political developments corresponds well with another result from the survey. The highest-rated risk is now “geopolitical conflicts,” replacing “inflation” as the most feared. Does this mean that the world has become more unsecure? The concern has gone up since last month, but the main reason behind the shift is a clear drop in concern about inflation.
Another remarkable reason why this month’s survey is extraordinarily interesting is the timing. The survey was conducted right before the attack on Donald Trump and later, US President Joe Biden’s decision not to run for a second term. This means that next month we will have a pretty clear picture of how these developments change fund managers’ expectations as the rest of the world is currently stable to unchanged.
Looking at the positioning in the financial markets lately, there was growing belief that Trump would win back the US presidency. After the new situation in the US election battle, some positions in stock markets were reduced, though it has not caused big gyrations so far.
Traditionally, a US presidential election might lead to a couple of days with movements on Wall Street, but normally not high volatility for a longer period. Therefore, I do not expect the next survey to show bigger concerns. On the contrary, the current concern over “geopolitical conflicts” could be rated lower as the US presidential election is completely open again. One where Trump might be seen as a US president that seeks global conflicts with sharp communication.
The possibility of a so-called US election sweep will probably also be rated lower, which is the situation where one party wins the majority in both chambers on Capitol Hill in Washington, D.C. It is particularly important if the Republicans win both the Senate and the House as Trump argues for increasing the government budget deficit to cut taxes. This will make bond investors nervous.
Peter Lundgreen is the founding CEO of Lundgreen’s Capital. He is a professional investment advisor with over 30 years of experience, and a power entrepreneur in investment and finance. Peter is an international columnist and speaker on topics about the global financial markets.
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