Bullish fund managers ignoring stagflation fears

London

GLOBAL fund managers are enthusiastically bullish and are ignoring fears of stagflation, with seven in 10 respondents to the latest survey by Bank of America (BOA) expecting to see "above-trend" growth and inflation.

This is a record sentiment high, according to the investment bank's market strategists. The survey shows that the majority of the 215 fund managers, with US$625 billion in assets under management, are "unambiguously bullish".

Only 8 per cent of respondents predict stagflation so the combination of slack growth and inflation is "not yet in vogue".

Several economists, however, believe that stagflation is a high risk as China is already slowing down, the pandemic is raging through India and there is persistent uncertainty in the US, much of Europe and across South-east Asia.

The survey shows that fund allocations to commodities have risen to protect against inflation.

"Late cycle" bank & resource stock positions now exceed 2006 highs. The majority of fund investors are overweight in UK stocks for the first time since 2014.

They tend to agree with Bank of England chief economist Andy Haldane, who forecasts that the UK economy in 2021 will grow at its fastest pace since World War II.

As many as 93 per cent of survey respondents expect European growth to improve over the next 12 months and that equities will peak next year.

Four in five of the fund managers believe that inflation is set to rise over the coming 12 months, but only 35 per cent perceive it as a market risk.

The stagflation school of economists observe that the change from fund manager pessimism a year ago to present rampant optimism, may well be a contrary indicator.

Brendan Brown, the founder of Macro Hedge Advisors, says inflation has mainly surged because of supply disruptions and speculation in commodities.

"Once they have caught up with buying items they postponed during the pandemic, households could pull back spending," he said.

"Businesses and consumers are likely to consolidate their financial position ahead of future taxation increases" that are needed to reduce massive debt.

"We can imagine several quarters from now, indeed sooner possibly, there'll be a sharp deceleration of quarterly growth, even into negative territory," Mr Brown added.

Simon Hunt Strategic Services, which monitors China closely, is not surprised that the economy is slowing down.

Simon Hunt, who heads the firm, notes that the Chinese authorities "are focusing on reducing debt and deleveraging, not on stimulating growth".

Consumers in China are already cautious and are preferring to save rather than spend, he said.

Mr Hunt, who believes that growth in China and elsewhere will ultimately lead to an increase in metals demand, is currently concerned about the extent of speculation in copper and other metals.

"So fast has been the rise in copper prices that fabricators and their customers have not been able to absorb the price increase to over US$10,000," he says.

"Working capital even within the largest companies has become a serious problem let alone for smaller ones. The banks are not prepared to extend credit lines because of rising copper and other metal prices."

Mr Hunt said the problem is that many "super-cycle enthusiasts" ignore history.

"After such an infusion of liquidity both via monetary and fiscal policies, there is always a correction. Good parties as this one assuredly always end in hangovers," he said.

In a recent article for Project Syndicate, economist Nouriel Roubini warned that supply shocks and excessive monetary and fiscal largesse could lead to similar stagflation conditions of the 1970s.

Then there were a series of oil shocks, steep stock market rallies and downturns.

"We are recovering from a negative aggregate supply shock. As such, overly loose monetary and fiscal policies could indeed lead to inflation or, worse, stagflation (high inflation alongside a recession)," he wrote.