Inflation expectations surge in March

Inflation expectations have jumped among investors, the latest fund managers survey by Bank of America Merrill Lynch shows.

Due to the European Central Bank’s quantitative easing programme, global expectations that inflation will rise surged for the second straight month to a net 52% of the fund managers interviewed in March from a net 29% in the previous month.

Inflation expectations in investor survey

Inflation expectations are creeping up. Source: Bank of America Merrill Lynch

The survey was carried out between March 6 and March 12 among 207 panellists with $565 billion worth of assets under management (AUM).

Inflation expectations were even higher for fund managers focused on Europe only, rising from a net 39% in January to a net 63% in March among 92 participants with $192 billion in AUM.

Among global investors, the net proportion of those saying stocks are overvalued is the highest since May 2000.

This reading is consistent with a big jump in investors naming “equity bubbles” as the biggest risk. In March, 12% of investors said this was the biggest “tail risk,” pushing the issue to the fourth place.

Geopolitics is the number one risk cited by investors, followed by the danger of Chinese defaults on debt, a crisis in emerging markets and the Federal Reserve falling behind the curve – which most likely means the Fed raising rates too late and thus not managing to control inflation.

In terms of when the first Fed rate hike will take place, 32% of fund managers surveyed said it would be in the second quarter, while 41% still believe the third quarter is the most likely.

Positive positioning in eurozone equities versus negative in emerging markets is now the most extreme on record, and “contrarians would go long emerging markets equities and short eurozone equities,” the survey showed.

It also showed there had been a big jump in allocation to alternative investments, the highest since August 2008.

Sentiment is still “risk-on”, nevertheless, as allocation to cash dropped to the lowest level – a net 2% — since May 2013, just before the “taper tantrum.”

In terms of sectors, besides emerging markets contrarian “longs” are energy, cash and commodities while contrarian shorts, besides eurozone equities, are discretionary, real estate and Japan.

The most overcrowded trade is the US dollar, followed by long EU periphery debt, long US high-yield debt, long Eurostoxx 50 – the leading blue-chip index for the eurozone — and long US tech stocks.