BofA survey shows 'stable pessimism' as China stabilizes economic outlook

Investors still have a terrible feeling about the global economy.

But at least it doesn’t get any worse.

According to the latest Bank of America Global Fund Managers Survey, investor fears over the economic outlook eased slightly last month as China showed signs of reopening after zero-COVID policies gripped its economy for nearly three years.

The survey found that a net 69% of respondents expect weaker growth next year, a modest improvement from November’s 73%, reflecting what strategists led by Michael Hartnett called “stable pessimism” among investors.

Bank of America attributed this month’s improvement to more optimism about the Chinese economy, with 74% of survey respondents expecting China to fully reopen by the end of 2023.

Investors are still fairly pessimistic about the global economy, but that negativity is showing signs of leveling off, according to Bank of America. (Source: Bank of America Global Research)

Expectations for an outright economic downturn also improved last month, with 68% of net investors expecting the global economy to slide into recession in the next year, up from 77% in November.

“The easing of recessionary expectations was likely due to improved prospects for China’s growth,” BofA said, citing an increase in the number of investors expecting a stronger Chinese economy in 2023 to three-quarters of respondents in December’s fund manager survey. up from 13% in the previous month.

People in protective suits wait in a bus stop shelter of a train station after the government eased control of the coronavirus disease (COVID-19) in Wuhan, China's Hubei province, 11 December 2022. REUTERS/Martin Pollard — People wearing protective suits at a train station after the government eased restrictions on COVID-19 controls in Wuhan, Hubei province, China, 11 December 2022. REUTERS/Martin Pollard

While the overall downside remained near record levels, Bank of America’s investor sentiment gauge showed other bright spots.

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Notably, a record 90% of allocators believe global inflation will fall over the next year. Consensus expectations are for the US consumer price index (CPI) to fall to 4.2% over the next 12 months.

Expectations of lower inflation fueled expectations of lower short-term interest rates, with most investors (42%) calling for a fall in short-term yields since March 2020.

Meanwhile, the federal funds rate — or the Federal Reserve’s main short-term policy rate — is widely expected to peak at 5% in the second quarter of 2023.

Investor cash balances, which are typically elevated during times of market volatility and economic uncertainty, fell to 5.9% from 6.2% in the previous survey. Predictions for a fall in the US dollar, which had risen to its strongest level in two decades this year, rose to its highest level since 2006.

Nonetheless, investors’ aversion to equities continued in November. In December, investors were 10% net overweight in bonds for the first time since 2009.