European fund managers are experiencing a surge in optimism as hopes for economic recovery gain momentum, according to the latest Bank of America European Fund Manager Survey. Despite this optimism, concerns about potential market corrections triggered by central bank policies loom large, prompting a cautious approach to investment strategies.
Key findings from the survey reveal a notable improvement in sentiment regarding Europe’s economic outlook. Half of the respondents anticipate a stronger European economy over the next year, marking the highest level of optimism since July 2021. However, worries persist about the potential effects of monetary tightening, with 36% of respondents still foreseeing a slowdown, albeit significantly down from previous months.
Inflation remains a top concern among fund managers, with 41% viewing rising inflation as the most significant market risk, surpassing concerns about geopolitics. Expectations of sustained inflation alongside robust economic growth have led to increased anticipation of higher interest rates, with 43% of respondents now foreseeing this scenario.
While overall expectations for global core inflation have decreased slightly, there are growing apprehensions about sustained inflationary pressures. Recent data from the Eurozone confirms a 28-month low in annual consumer price inflation, but inflation rates in the UK and the US have surpassed expectations, adding to concerns.
Money markets are forecasting approximately 80 basis points in rate cuts from the European Central Bank for this year, suggesting a slight adjustment from previous expectations. Despite this, investor allocations to eurozone equities have surged, reaching the most significant overweight since February 2022.
However, confidence in near-term market gains has tempered, with concerns about hawkish central bank policies driving cautious optimism. Energy has replaced technology as the sector with the largest consensus overweight, supported by positive PMI data and improving credit conditions.
Regional preferences among European countries fluctuate, with Spain and the UK leading as preferred markets, while Switzerland and Germany lag. European banks have garnered attention from investors due to higher profitability and strong cash yields, while sectors such as technology, industrials, and consumer sectors are considered overvalued.
Overall, the survey reflects a cautiously optimistic investment landscape in Europe, with fund managers navigating economic recovery prospects alongside concerns about inflation and central bank policies. Balancing growth opportunities with potential risks remains paramount as investors adjust their strategies in response to evolving market conditions.
