International fund managers have become significantly more pessimistic again, according to the latest survey conducted by Bank of America Securities. The survey, which involved 295 participants managing a total of $736 billion, revealed that the cash ratio rose from 4.9% to a high of 5.3% in October.

Participants express pessimism, particularly regarding the global economic outlook. A significant majority of 50% of respondents now expect the world economy to weaken in the next twelve months. While 64% believe in a soft landing of the economy, the proportion of investors predicting a hard landing has increased from 21% in September to 30% in October.

High inflation and major central banks maintaining their course of interest rate hikes are identified as the biggest market risk by 31% of participants. But the percentage was even higher in September. An increase in geopolitical conflicts is now seen as the second-largest risk. It was mentioned by 23% of respondents, compared to 14% in September. The third-largest risk, mentioned by 21% of respondents, is a global recession and a sharp downturn in the world economy.

In terms of systemic risks in the bond and credit markets, real estate in the US and Europe is perceived as the most dangerous by 34% of participants. This risk is seen as more significant than the one coming from the Chinese real estate market (22%). Other potential triggers for a systemic credit event include the American shadow banking system (21%), U.S. government bonds (10%), and Japanese government bonds (5%). This positions the real estate sector, specifically the one in the United States, as particularly hazardous for the credit markets.

Despite the challenges, there are also some positive developments. The expectations of fund managers regarding the profit prospects of global companies have improved slightly. Nevertheless, a net 37% of participants still anticipate a slowdown in earnings dynamics, compared to 41% in the previous month. Moreover, a majority of net 14% of respondents now expect the Chinese economy to perform better in the next twelve months. However, immediately after the reopening of the Chinese economy following the coronavirus pandemic, a net 78% of participants had expected this. Only one in four fund managers anticipates that there will be no recession in the next 18 months.

At least, however, institutional investors expect inflation to ease further. 80% foresee that global consumer price inflation will continue to weaken in the next twelve months. Accordingly, 73% anticipate that short-term interest rates will decrease during the same period. Three-quarters of the survey participants expect the yield curve to steepen within twelve months. The yield on ten-year US Treasuries recently reached the highest level in 17 months. Nevertheless, based on expectations, this trend will not continue, with 56% of managers believing that bond market yields will decline over the next year. In response to the question of whether the Federal Reserve will not implement any more interest rate hikes, 60% said that it would not. More than half of the participants expect the Fed to make its first interest rate cut in the second half of 2024.

Long positions on large technology stocks are considered particularly overcrowded. Short positions on Chinese stocks are also prevalent. Currently, there is a rotation of market participants from European to American stocks. For instance, a net of 6% are favoring US dividend stocks, while a net 10% are avoiding stocks from the old continent. Japan is considered attractive, with a net 16% of participants being overweighted. Concerning sector allocation, investors are moving from daily consumer goods, which are currently underweighted by net 4%, to the energy sector, which is currently overweighted by net 8%. Besides the energy sector, commodity stocks, telecommunication companies, and raw materials are also deemed appealing.