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Fund Managers’ Biggest Fear Is Now a Systemic Credit Crunch

(Bloomberg) — A systemic credit event has replaced stubborn inflation as the key risk to markets for increasingly pessimistic investors, according to Bank of America Corp.’s latest global survey of fund managers.

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The most likely source of a credit event is US shadow banking, followed by US corporate debt and developed-market real estate, according to the poll, which canvassed 212 fund managers with $548 billion under management. A credit event was chosen by 31% of participants as the biggest threat.

The polling took place from March 10-March 16, while money managers were witnessing the collapse of US lenders Silicon Valley Bank and Signature Bank and monitoring the turmoil at Credit Suisse Group AG before its historic takeover by UBS Group AG. The S&P 500 has been mostly resilient, falling less than 1% this month, with investors anticipating the Federal Reserve’s efforts to support liquidity to be enough to avoid a crisis.

But strategists are growing concerned, with Morgan Stanley’s Michael Wilson saying the risk of a credit crunch is increasing materially. The S&P 500 might find a floor at 3,800 but investors should sell into any rallies if the benchmark reaches 4,100 to 4,200, BofA’s Michael Hartnett wrote in the note on Tuesday. The S&P 500 closed Monday at about 3,952.

Moreover, the poll showed investor sentiment is “close to levels of pessimism seen at lows of past 20 years,” wrote Hartnett, who was correctly bearish through last year, warning that recession fears would fuel a stock exodus. Fund manager survey positioning and sentiment is “the only key measures in ‘capitulation’ territory so far.”

On top of the credit risks, investors are growing concerned about the economy. The likelihood of a recession is rising again for the first time since November, with BofA’s survey showing a net 42% of participants expecting a slowdown over the next 12 months. Meanwhile, expectations for stagflation have remained above 80% for 10 months in a row. In the survey’s history, “investors have never held such strong conviction about the economic outlook,” Hartnett wrote.

Other highlights include:

  • Investors see an additional 75 basis points of Federal Reserve hikes in this cycle with rates peaking at 5.25%-5.5%. Almost a quarter expect the European Central Bank to lift its deposit rate by an additional 50 basis points

  • The rotation out of US equities into Europe accelerated this month, with fund managers the most overweight on Europe relative to the US since October 2017

  • Most crowded trades are long European equities, long the dollar and long China equities

  • Participants are now net underweight banks, with contagion risks across US regional banks driving investors out of the sector at the fastest pace since Russia’s invasion of Ukraine

–With assistance from Michael Msika.

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