Investors are optimistic but wary of geopolitics, BofA says

Expectations US interest rates will fall, preventing a hard landing for the economy, has kept investors bullish, although geopolitics pose the biggest risk to that scenario, the Bank of America's global fund manager survey showed on Tuesday.

The survey polled 242 managers with $632 billion in assets under management in the week of July 5-11. It did not capture the assassination attempt on US presidential candidate Donald Trump at a political rally at the weekend.

Global growth expectations dropped by the most month-on-month since March 2022, with this metric falling to -27 per cent from -6 per cent, the survey showed, as the number expecting a weaker US economy increased sharply.

The bank said this reflected the view that interest rates are about to ease, as investors view monetary policy as at its most restrictive since the 2008 financial crisis.

"Monetary policy is too restrictive according to 39 per cent of investors, the most restrictive since November 2008, but this in turn deepens the belief that global interest rates are set to fall over the next 12 months," the BofA survey's authors, led by investment strategist Michael Hartnett, said.

Of those polled, 68 per cent predicted a soft landing - where growth and inflation gradually ease - as the most likely outcome for the global economy, the bank said.

"We believe 'hard landing' risks are underpriced, given the slowdown of US consumer, labour market, government spending. This makes us most bullish on bonds and gold in H2’24," the BofA team said.

Politics, in the United States and elsewhere, have become stronger drivers of markets in the last month.

A snap election in France delivered a hung parliament and US President Joe Biden came under pressure to step down as the Democratic party candidate, after his appearance at a televised debate with Trump triggered concern about his ability to serve another four years in office, should he win in November.

Russia's attack on Ukraine is well into its second year, while Israel's war on Gaza has stoked tensions in the Middle East and relations between China and Taiwan have become increasingly fraught.

The fund manager survey showed "geopolitical conflict" overtook "higher inflation" as the biggest tail risk for the investment outlook for the first time in six months.

Investor positions remain overweight stocks and underweight bonds. The survey also showed exposure to European Union equities fell by the most in two years.

Fund managers hold their largest underweight position in real estate investment trusts (REITs) since January 2009, while adding the first overweight in utilities, which tend to lag when interest rates are high, since February 2009.

Ownership of the "Magnificent Seven" group of the seven most valuable US stocks, which includes Apple, Microsoft and Nvidia, was cited as the most crowded trade "by a country mile", BofA said. (Reporting by Amanda Cooper; Editing by Alun John and Barbara Lewis)