Bank of America March Portfolio Manager Survey

Accelerating inflation in the US had a negative impact on international investor sentiment. Portfolio managers expect the Fed to begin lowering the base rate only in the second half of the year. The Central Bank of the Russian Federation is also unable to cope with inflation. Therefore, analysts do not expect a reduction in the Russian key rate in the coming months, noting the possibility of this in June-July at the earliest.

A March survey of portfolio managers conducted by Bank of America (BofA) analysts shows a noticeable increase in inflation fears. The survey included 226 portfolio managers managing $572 billion. The number of respondents who said that inflation is a key risk with unpredictable consequences for the economy was 32%, which is 5 percentage points higher than in February. At the same time, the number of managers who do not expect a recession in 2024 still remains at two-thirds of those surveyed.

Managers are concerned about the acceleration of inflation in the United States. On March 13, the Ministry of Labor reported that annual inflation in February accelerated to 3.2% from 3.1% a month earlier. Analysts predicted that inflation would remain at the January level, according to Trading Economics estimates. “The increase in inflation fears may be associated with a general feeling of a decline in recessionary fears that prevailed in 2023,” says Sofya Donets, chief economist for Russia and the CIS+ at Renaissance Capital.

The market reacted especially sharply to the dynamics of the producer price index (PPI), which increased by 0.6%, showing the highest growth rate since June 2022. “Producer prices are a good indicator of future inflation, which is likely to be reflected in consumer prices in a few months,” explains Astero Falcon investment director Oleg Novikov. According to him, therefore, market participants “fear the acceleration of consumer inflation.”

Against this background, investors’ expectations regarding the pace and timing of the Fed’s turn to softer regulation are decreasing. If at the end of 2023 the probability of a rate cut at the meeting of the American regulator, which ends on March 20, was estimated at almost 80%, now the probability that the rate will not be changed is 99%. “Since the beginning of this year, market participants have already removed a total of four rate cuts of 0.25% each from their forecasts, and the first rate cut is currently expected no earlier than July of this year,” notes Oleg Novikov.

In such conditions, managers are gradually increasing the share of cash in their portfolios (from 4.2% to 4.4%). At the same time, investor preferences also adjusted. If in February investments in shares of American companies grew at a faster pace, then in March preference was given to European issuers, as well as issuers from developing countries.

Similar expectations were formed regarding inflation and the policy of the Bank of Russia. According to a March survey of analysts conducted by the Central Bank, inflation expectations at the end of the year were worsened from 4.9% to 5.2%. According to Sofia Donets, high consumer activity against the backdrop of rising incomes, as well as planned indexation of tariffs and pressure on wages from a shortage of personnel create risks that inflation at the end of the year will be higher than the forecast of the Bank of Russia. “At the same time, we expect a gradual slowdown in the current rate of price growth throughout the year,” the expert notes.

Under the current conditions, the market has formed expectations of a later reduction of the key rate by the Russian Central Bank. PSB chief analyst Denis Popov believes that at the meeting of the board of directors of the Central Bank this Friday, the key rate will be kept at 16%. However, he does not rule out some softening of the rhetoric against the backdrop of slowing inflation in February. However, he expects the key rate reduction cycle to start no earlier than June. Sovcombank does not rule out such a transition in July. According to Mr. Popov, the cycle of reducing the key rate will be long and its return to the neutral level (6-7%, according to the Central Bank) will take at least a year and a half.

Vitaly Gaidaev