Big investors position for rate cuts with dash into riskier assets

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Big investors are turning to riskier assets such as emerging markets and high-growth companies as their confidence increases that global interest rates are set to tumble without a sharp economic downturn, according to a closely watched survey.

Only 17 per cent of the fund managers polled by Bank of America expect a so-called hard landing — which typically implies a recession — for global growth, the smallest proportion in 19 months.

The growing faith in a “soft landing” for the global economy, in which central banks succeed in bringing inflation under control without sparking a downturn, comes after large economies — most notably the US — outperformed expectations despite the effects of high interest rates.

The overwhelming majority of investors now believe borrowing costs are set to fall, with 91 per cent of respondents saying short-term interest rates will be lower in 12 months’ time.

“Investors have never been as bullish on short-term rates as in January 2024,” BofA analysts wrote, adding that “growth optimism over the past month has coincided with rising global equity prices”.

The combination of falling rates and a benign economic outlook has led fund managers surveyed by BofA in January, who collectively manage $669bn in assets, to favour riskier assets.

A quarter of fund managers said that stocks with long-term growth prospects such as biotech and renewable energy companies would be the biggest beneficiaries of US federal reserve rate cuts, making them the most popular choice. Value stocks, such as banks and real estate companies, were chosen by just under a fifth of investors, while a similar proportion picked emerging market equities.

Long-term US government debt dwindled in popularity compared with December’s survey following a big rally over the past month.

Managers retained their overweight position in US equities, while remaining underweight UK and eurozone stocks. Small-cap stocks are expected to outperform large caps for the first time since June 2021.

Meanwhile global investors’ pessimism on the Chinese economy deepened, with net growth expectations turning negative and dropping to levels last seen in May 2022.

Short positions in Chinese equities were seen as the second most “crowded” trade after long positions in the “magnificent seven” megacap tech stocks that dominate US equity markets.

Investors also said they were most concerned about the US shadow banking sector as the source of a systemic crisis, replacing a Chinese property crash as the number one risk, echoing recent warnings from regulators.

Geopolitics once again took the top spot as the biggest tail risk to markets, amid concerns about an escalation to conflict in the Middle East, US-China tensions and volatility in a year in which half the world’s population will vote.

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