Systemic credit event now seen as the biggest tail risk

By Senad Karaahmetovic

Investor sentiment is close to levels of pessimism seen at lows in the last 2 decades, according to Bank of America’s March Global Fund Manager Survey (FMS). The sentiment/positioning is consistent with prior major market lows, according to BofA’s strategists.

The investor sentiment declined in March with the average percentile rank of next-12-month growth expectations, cash allocation, and equity allocation falling to the lowest level since December 22.

“Net 51% of FMS investors expect a weaker economy in 12 months, up from 35% last month and highest since Nov’22. Note that the index has been flat over the same period and has not caught up with the deteriorating macro outlook,” the strategists wrote in a note.

FMS now indicates a 42% probability of the U.S. going into a recession, up from 24% in February – the biggest increase since last July. On the other hand, the vast majority of investors still expect headline to be lower a year from now.

On front, 57% of FMS investors expect lower short-term rates. Overall, investors see an additional 75bp hike this cycle.

As far as risks are concerned, the systemic credit event is now seen as the biggest tail risk (31%), ahead of high inflation (25%). Along these lines, U.S. shadow banking is listed as the most likely source of a credit event (34%), ahead of U.S. corporate debt (17%).

The March FMS report also confirmed the trend of rotation from U.S. to euro zone equities with investors now the most OW euro zone stocks relative to U.S. stocks since October 2017. However, long European equities is now the most crowded trade (19%), ahead of the long (18%).

Investors were also selling financials last week at the fastest pace since Russia invaded Ukraine. FMS investors are now net UW banks (3%) and tech (6%) stocks, the report shows.