Investors Bet on a Soft Landing as Recession Fears Subside
Investors are increasingly confident that the global economy will achieve a "soft landing," where inflation subsides without significant deterioration in overall economic activity despite higher interest rates. This optimism is driven by expectations for lower interest rates in the coming year, according to the latest Bank of America Global Fund Manager Survey.Investors Bullish on a Soft Landing Scenario
Soft Landing Outlook Reaches New High
In the August survey, a remarkable 76% of respondents said a soft landing is the most likely outcome for the global economy in the next 12 months. This represents the highest percentage of investors projecting such an outcome since the survey began in May 2023. The survey's chief investment strategist, Michael Hartnett, attributed this bullish sentiment to "expectations for lower interest rates."Confidence in Lower Rates Surges
The survey findings indicate that investors are increasingly confident in the prospect of lower short-term interest rates. In fact, 93% of respondents said they expect lower short-term rates in the next 12 months, marking the highest level of confidence in lower rates in the past 24 years.Anticipation of Rate Cuts Grows
Aligning with this outlook, 60% of investors surveyed expect four or more interest rate cuts this year. This forecast is in line with current market pricing, which projects four interest rate cuts in 2024, according to Bloomberg data.Recession Fears Subside, but Risks Remain
The survey was conducted between August 2 and August 8, after a weak July jobs report that had initially stoked recession fears and sent markets into a tailspin. However, investors' assessment of the economic narrative largely fell in line with the view held by many economists: the soft landing is still within reach, but Fed rate cuts are necessary to get there.Morgan Stanley's Outlook: 75 Basis Point Cuts in 2023
In a weekly note to clients, Morgan Stanley's chief global economist, Seth Carpenter, projected that the Federal Reserve will cut interest rates by 75 basis points this year. Carpenter reasoned that the "cumulative evidence to date shows a solid job market and a consumer who continues to spend," which are self-reinforcing factors that can maintain economic momentum. He added that the market has already eased rates for the Fed, so the central bank just needs to "follow through on our baseline for the soft landing to materialize."Investors Shift Asset Allocation Accordingly
As a result of this optimistic outlook, investors have adjusted their asset allocation, moving out of stocks and into cash and bonds at the fastest pace since September 2022. Respondents to the survey now hold their lowest allocation to stocks since January 2024, reflecting their rational response to the evolving economic risks.In conclusion, the latest Bank of America Global Fund Manager Survey paints a picture of growing investor confidence in the global economy's ability to achieve a soft landing, driven by expectations of lower interest rates and the potential for the Federal Reserve to deliver on this outcome. While risks remain, the survey suggests that investors are positioning themselves to capitalize on the potential for a smoother economic transition in the months ahead.
