Systemic Credit Crunch Replaces Inflation as Fund Managers’ Top Worry

Major US bank CEOs testify during a Senate Banking, Housing, and Urban Affairs Committee Hearing on the Annual Oversight of the Nations Largest Banks on Capitol Hill in Washington, on Sept. 22, 2022. Saul Loeb/AFP via Getty Images

A systemic credit crunch has overtaken inflation as fund managers’ top fear this month as the biggest risk to the markets, according to a new poll.

At least 31 percent of respondents labeled a systemic credit crisis as the most significant threat to markets, followed by 25 percent choosing stubbornly high inflation as the largest tail risk.

According to the fund managers questioned in the survey, the most likely source of a credit event is U.S. shadow banking (i.e., non-bank financial intermediaries, typically unregulated), followed by U.S. corporate debt and developed-market real estate.

Inflation worries were followed by fears of continuous hawkish central bank policies, worsening geopolitical stability, a massive global recession, and the rising probability of a global stock market crash.

The new data come from Bank of America’s (BofA) global survey published on March 21, which questioned more than 212 fund managers with $548 billion under management for their input on the market.

The participants were surveyed between March 10–16, as Silicon Valley Bank and Signature Bank collapsed and just before UBS’s takeover of Credit Suisse on March 19.

Most of the respondents hoped that the Federal Reserve’s efforts to support the liquidity markets in the wake of three consecutive U.S. regional bank failures would be enough to avoid a crisis.

Credit Markets Will Likely Tighten, Says Analyst

Meanwhile, Eric Johnston, of Cantor Fitzgerald, told CNBC on March 21 that credit markets will tighten significantly over the next few weeks following the recent bank failures.

“I think the bottom line from the events over the last two weeks are twofold,” said Johnson, who then warned that “credit is going to tighten significantly coming out of this.”

“So this was happening prior to Silicon Valley Bank, if you look at some of the surveys from loan officers credit, heading into it was one of the four one of the five tightest conditions in the last 30 to 35 years. And each time we’ve gotten to this level, we’ve seen a recession very shortly after. And that was before the Silicon Valley Bank news.”

“So no matter how this gets resolved, regional banks are a tremendous source of liquidity to this economy, and they are going to be tightening their credit standards,” he added.

“You can’t go from the tightest policy, excuse me the most loose policy in the history of the Fed, and then turn that around 13 months later, and have the tightest we’ve seen in the last 2030 years, and not have a accident happen,” noted Johnson.

US Investor Sentiment Plunges

Michael Hartnett, a BofA investment strategist, who bearishly predicted that recession fears would fuel a stock exodus last year,  wrote in the report that investor sentiment is near “levels of pessimism seen at lows of past 20 years” and that the benchmark S&P 500 Index might find a floor of 3,800.

He also added that “investors have never held such strong conviction about the economic outlook" since BofA’s survey was first taken.

The S&P 500 has declined less than 1 percent over the past month, while gaining almost 3 percent so far this year, and closing on March 20 at about 3,952.

Harnett recommended that investors should look to fade any rallies when the S&P hits between 4,100 and 4,200.

“FMS [Fund Manager Survey] investors’ sentiment worsened in February, with two out of three key measures of sentiment deteriorating MoM [month over month],” he wrote.

“The average percentile rank of next 12-month growth expectations, cash allocation, and equity allocation declined in March 2023 to the lowest level since December 2022.”

After “15 months into a stock bear market, there has not been a conclusive inflection point in economic growth expectations.”

“Net 51 percent of FMS investors expect a weaker economy in 12 months, up from 35 percent last month and highest since November 2022. Note that the S&P 500 Index has been flat over the same period and has not caught up with the deteriorating macro outlook,” Hartnett added.

On top of the credit risks, more investors have been concerned about the economy since last November.

Fears of a U.S. recession have risen since February, with 42 percent of fund managers predicting one within a year, while stagflation expectations remain above 80 percent for 10 consecutive months.

Fund manager survey positioning and sentiment is “the only key measures in ‘capitulation’ territory so far,” he said.

As the same time, 55 percent of the investors surveyed, said they were urging corporations to improve their balance sheets and have started to rotate out of stocks in the sectors of banking, consumer, and real estate investment trusts, while shifting into eurozone stocks, staples, and bonds.

The survey also found that fund managers are more bullish on eurozone stocks than U.S. stock for the first time since October 2017.

The most crowded trades currently include long European equities, long U.S. dollar, and long China equities.