Inflation now seen as top 'tail risk' as COVID-19 fears fade

Once considered the number one investor "tail risk" after it became a global pandemic in March 2020, COVID-19 is no longer deemed the largest risk, a BofA Global Fund Manager Survey has found.

Inflation is now seen as the bigger risk (by 37 percent of those surveyed) followed by taper tantrums (35 percent).

The other two "tail risks" in March 2021 are COVID-19 vaccine rollout (13 percent) and a bubble on Wall Street (6 percent).


Economic expectations are bullish with most investors (48 percent) saying it's a V-shaped recovery (vs. 10 percent in May 2020), the Fund Manager Survey (FMS) found.

Among the FMS investors, 89 percent expect global profits to improve over the next 12 months, up +5ppt month-on-month (MoM), which is the highest ever, surpassing both February 2002 and December 2009 highs.

The FMS indicates that CIOs want CEOs to increase capex (now 52 percent, highest since January).

Net 93 percent of FMS investors expect higher inflation in the next 12 months, up 7 percent MoM, now an all-time high.

On average, FMS investors believe that the 10-year Treasury yield at 2.5 percent makes bonds attractive relative to stocks.

On average, FMS investors believe that the US Federal Reserve will start hiking rates in February 2023.

Investors continued to get more cyclical in terms of asset allocation with the spread between the net investors overweight (OW) equities and the net investors OW bonds close to the highest levels ever.

FMS hedge funds' net exposure to equities also rose in March to 46 percent (+7 percent MoM), to the highest level since June 2020, up from 29 percent in August 2020.

FMS investor optimism on commodities increased to net 28 percent, highest ever. The last time investors were this positive was back in February 2011 when Brent was over $100/bbl.

A record 52 percent of FMS investors now think value will outperform growth in the next 12 months.




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