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Inflation expectations surge, says BofA ML survey

Inflation expectations among global fund managers have soared, according to December’s Bank of America Merrill Lynch Fund Manager survey.

In December a net 61 per cent of managers said they expect inflation to be higher in the coming 12 months, up from 48 per cent in November and a sharp contrast to July, when a net 12 per cent expected disinflation.

According to the survey inflation expectations are back to a level seen last January and are close to a six-year high.

Gary Baker, the head of European equities strategy at BofA Merrill Lynch Global Research, says expectations for ongoing monetary stimulus have caused inflation expectations to surge. However this has had no impact on risk appetite as cash balances remain low, at 3.6 per cent.

 “We end the year in a similar way to how it started,” says Baker. “The overall message is that managers are still optimistic on growth, while risk appetite is at a similar level to last month.”

The two main changes in this month’s survey compared with November’s is that managers have increased their underweight stance to bonds, while energy replaced technology as the most favoured sector. This is the first time this year that tech has not been the most popular sector.

Given the surge in inflation expectations bonds were cut sharply by asset allocators, from a net 36 per cent in November to a net 46 per cent in December. This compares with an average net 33 per cent underweight over the past decade.

“There is a feeling that investors are being compelled to invest in more risky assets as a result of actions by the Fed,” says Baker. “Investors feel they have little choice other than to be invested, which explains why cash balances are so low.”

In terms of regions American equities were the prime beneficiary of not only an upswing in global investor sentiment, but also Europe’s continuing sovereign debt crisis. In December a net 16 per cent of asset allocators were overweight in American stocks, up from a net 1 per cent last month.

Some 209 managers running £359billion of assets participated in the survey, conducted with TNS, a market research company, from December 3-9.

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