The threat of a credit crisis in the U.S. has overtaken stubborn inflation as the top concern for fund managers after a spate of bank failures earlier in March, according to a new Bank of America survey.
About 31% of participants in the global fund manager survey identified a "systemic credit event" as the top risk to markets, compared to about 25% who highlighted sticky inflation as the biggest threat.
The most likely source of a credit event, according to the fund managers, is shadow banking – or non-bank financial institutions that are not subject to regulation including hedge funds, private equity funds, investment banks and mortgage lenders. Other possible sources include the U.S. corporate debt, followed by developed-market real estate.
The poll of 212 fund managers was conducted between March 10 and March 16, while fund managers were watching the stunning implosion of Silicon Valley Bank and Signature Bank in real time, but before UBS moved to acquire ailing Swiss lender Credit Suisse.
Silicon Valley Bank collapsed after a liquidity crunch, forcing a government takeover and raising questions over the fate of nearly $175 billion in customer deposits. It marked the largest U.S. bank failure since the global financial crisis in 2008, and rising interest rates played a pivotal role in SVB's collapse.
"Contagion risks across U.S. regional banks drove investors out of the US bank sector this month at the fastest pace since Russia’s invasion of Ukraine," said Michael Hartnett, chief investment strategist at Bank of America global research.
Hartnett noted that investment sentiment is near "levels of pessimism seen at lows of past 20 years," and warned that the S&P could tumble to a low of 3,800 amid recent market woes. That would mark a 5% decline from current levels.
Recession fears are also swelling again, rising for the first time since November. About 42% of investors see a recession as likely in the next 12 months, compared to just 24% who believed a downturn was likely in February. It marked the biggest month-over-month increase since July.
An overwhelming number of investors see a "stagflation" scenario – in which economic growth peters out but inflation remains high – as very likely. Roughly 88% of investors anticipate that a stagflation backdrop will linger into the first quarter of 2024, up from 83% last month.
"Expectations for stagflation have remained above 80% for 10 months in a row," the survey said. "Fund manager investors have never held such strong conviction about the economic outlook."