Big money managers hoard cash, dump bonds as inflation fears mount

Market expert on inflation: It’s a ‘Tickle Me Elmo economy’

Adviser Investments CIO Jim Lowell weighs in on markets, inflation, supply issues and consumers. 

Big money managers are hoarding the most cash in a year amid concerns over inflation and slowing global growth, according to a survey conducted by Bank of America.

The average cash balance for respondents to Bank of America’s Global Fund Manager Survey was 4.7%, the highest since October 2020, as investors pulled cash from bonds, driving allocation to an all-time low. Bonds underperform in an environment of rising inflation. 

The October survey was the "least bullish since Oct’20," wrote Michael Hartnett, chief investment strategist at Bank of America. A net 6% of respondents said global growth will weaken in the next 12 months. 

The Charlotte, North Carolina-based lender surveyed 380 participants with $1.2 trillion in assets under management between Oct. 8 and Oct. 14. 

"Boom" expectations slipped to 61% from 66%, while "stagflation" expectations rose 14 percentage points to 34%. The gap between "transitory" and "permanent" inflation narrowed to 20 percentage points from 41 percentage points in September. 

A net 48% of respondents said inflation was the biggest "tail risk" to markets. Inflation or a bond market taper tantrum remained the biggest concern for an eighth straight month. Worries over the slowing Chinese economy (23%) and COVID (3%) rounded out the top three. 

Survey respondents expect 1.1 rate hikes from the Federal Reserve in 2022. Forty-four percent think the Fed will raise rates once next year, while 24% see two rate hikes and another 24% predict none. 

Long technology was deemed the most "crowded trade" by 35% of respondents, followed by Long ESG, Short China and Emerging Markets and Long Bitcoin. 

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Investors looking for contrarian plays should sell the U.S. and technology to protect against a "rate shock," and those worried about a "growth shock" should position long bonds, utilities, staples and short banks, energy and commodities, according to the survey.

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