BofA Survey Shows Investors Fleeing Equities en Masse on Fear of Recession

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(Bloomberg) — Investors are fleeing equities en masse amid the specter of a recession, with allocations to stocks at record lows and cash exposure at all-time highs, a Bank of America Corp. survey showed.

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A historically high 52% of respondents said they are underweight equities, while 62% are overweight cash, according to the bank’s global fund manager survey, which included 212 participants with $616 billion under management in the week through Sept. 8.

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As concerns over the economy escalate, the number of investors expecting a recession has reached the highest since May 2020, strategists led by Michael Hartnett wrote in a note on Tuesday. Sentiment is “super bearish,” with the energy crisis further weighing on risk appetite, they said. A net 42% of global investors are underweight European equities, the largest such position on record.

Global stocks have had a roller-coaster ride in the past few months. Declines have been driven by fears that central banks will remain hawkish for longer and tip the economy into a recession, while rallies have been fueled by low investor positioning and optimism around peaking US inflation.

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Strategists at top banks including Deutsche Bank AG and JPMorgan Chase & Co. say bleak investor sentiment — often a contrarian indicator for a stock rally — is likely to drive equities higher into the year-end.

Inflation Test

Bank of America’s Hartnett sees the extent of depressed sentiment and better-than-feared macroeconomic data boosting the S&P 500 to 4,300 points — nearly 5% above current levels. But he expects the index to fall back from that level, and remains “fundamentally and patiently bearish.”

Stocks will get a first test of that later today when data on the US consumer price index for August is released. Economists expect the figures to show inflation slowed for a second month, although that probably won’t be enough to stop the Federal Reserve from delivering another jumbo rate hike later this month.

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The outlook for corporate earnings is also deteriorating. A net 92% of participants in the Bank of America survey now expect profits to decline in the next year, while the number of investors taking higher-than-normal risk has fallen to a record low.

Persistently high inflation is seen as the biggest tail risk, followed by hawkish central banks, geopolitics and a global recession. Only 1% of participants see a resurgence in the Covid-19 pandemic as a tail risk.

Other survey highlights include:

• The most crowded trades are long US dollar, long oil and commodities, long ESG assets, short US Treasuries, long growth stocks and long cash
• A net 79% of participants see slower inflation in the next 12 months, while 36% say the Fed will stop hiking rates in the second quarter of 2023
• Monetary risk lingers, according to a near record share of investors, while rates are the most volatile since the global financial crisis
• Europe’s energy crisis will likely push the regional economy into a recession, almost 70% of participants say, while fewer believe an energy price cap announcement to be the most likely outcome
• Relative to the past 10 years, investors are long cash, defensives and energy, while being underweight equities, the euro zone, emerging markets and cyclicals