Global institutional investors have sharply revised their macroeconomic expectations, shifting from recession fears to concerns about a renewed bout of inflation in the United States.
A May survey by Bank of America covering 60 asset managers overseeing about $869 billion found that the resilience of the US economy has brought the prospect of further Federal Reserve rate increases back onto investors’ agendas.
Sentiment among market participants changed markedly over the past month:
- 28% of managers now believe that US inflationary pressures are significantly underestimated. The rate has doubled since April.
- 25% of respondents expect the Federal Reserve to surprise markets with a more forceful rate hike cycle than is currently priced in.
The return of hawkish risk is already altering portfolio construction. Investors are moving away from long sovereign‑bond positions and closing trades that bet on a steeper yield curve. Strong US macro data is viewed as the primary catalyst for renewed dollar strength.
There is no clear consensus on European Central Bank policy. While 58% of respondents consider potential rate increases necessary to rein in inflation, 31% regard further tightening as a regulatory mistake.
Emerging markets have staged a rebound from multi‑year lows. Funds have moved to an overweight stance on EM debt, preferring local currency instruments. Bank of America strategists cautioned that this optimism rests on shaky foundations given the elevated level of global geopolitical risk.
Flows have shifted away from defensive cash instruments amid rising inflation expectations. Buying risk is currently the most crowded trade, selected by 47% of managers. Long commodity positions rank second at 22%.
