Bank of America September 2023 CEO Survey: Investors Are Changing Regional Preferences

Portfolio managers expect the Fed to complete its key rate hike cycle. At the same time, investors are in no hurry to reduce the share of cash in their portfolios, but are changing regional preferences in favor of the US market.

A September survey of portfolio managers by Bank of America (BofA) analysts showed strengthening investor confidence regarding the completion of the Fed rate hike cycle. 258 fund managers with assets worth $678 billion took part in the global survey – 60% of them believe that the financial regulator has completed raising the key rate. 33% of respondents expect it to continue. In August, 47% of respondents spoke about an increase, in July – 88%.

Investors view US macroeconomic statistics positively. In July, the consumer price index amounted to 3.2%, while the core indicator fell to 4.7%. At the same time, unemployment in August rose to its highest since February 2022 and amounted to 3.8%, compared with 3.5% in July. “These data have increased investor confidence that the Fed will be able to return inflation to the target 2% and not push the economy into recession,” notes Sovcombank chief analyst Mikhail Vasiliev.

But the current 15-year record dollar interest rates still pose risks to the global economy. According to a BofA survey, the number of portfolio managers who are confident that its growth rate will slow over the next 12 months is 53% higher than those who expect it to accelerate. This is 8 percentage points (pp) higher than in August. “The longer dollar rates remain at current levels, the higher the likelihood of a recession. In addition, relations between the United States and China are deteriorating, which, together with structural problems in the Chinese economy, leads to lower forecasts for China’s GDP growth in this and subsequent years,” believes Mikhail Vasiliev.

As a result, there was a slight increase in the share of cash in the portfolios (from 4.8% to 4.9%), and the directions of investments in shares changed. Portfolio managers increased investments in securities of American companies. According to BofA, investments in them increased by 29 percentage points over the month, exceeding the indicative level by 7%. “The American economy continues to demonstrate dynamics that are better than investors’ expectations. Together with the expected end of the Fed rate hike cycle, this is spurring demand for shares,” says Dmitry Terpelov, asset manager at Sistema Capital.

Investors also actively reduced investments in shares of companies in developing countries. The number of managers whose weight in their portfolios exceeded the indicative one fell by 25 percentage points over the month, to 9%, the minimum since November 2022. “We see a flow from developing to developed markets due to improving sentiment in the latter,” says Eduard Kharin, head of the Alfa Capital equity directorate.

The decline in interest in emerging market markets is due to worsening expectations for the Chinese economy. In September, not a single portfolio manager surveyed by BofA favored accelerating its growth. The mood was more pessimistic in the spring of 2022 amid the “zero tolerance” of the country’s authorities towards the coronavirus. But, as Mr. Terpelov notes, the triggers were internal problems: late payment of coupons by a large Chinese developer Country Garden and the suspension of payments on investment products of one of the Chinese investment companies (Zhongzhi Enterprise).

Due to the fact that China is Russia’s largest trading partner, the domestic stock market may also be a loser. But so far, according to Dmitry Terpelov, the factor has not become significant. The Russian market, notes Mr. Kharin, “comes into contact with the global market through the prism of energy prices, which are at a fairly high level due to the actions of OPEC+ and improving investor sentiment on the global economy.”

Vitaly Gaidaev