BofA survey shows "pessimism stable" as China's economic outlook moderates

Investors still feel terrible about the global economy.

But at least things aren’t getting any worse.

Fears felt by investors over the economic outlook eased somewhat last month, according to the latest global survey of fund managers by Bank of America, as China showed signs of reopening after non-Covid policies had gripped its economy for nearly three years.

The survey found that a net 69% of respondents expected weaker growth next year, a modest improvement from 73% in November, reflecting what strategists led by Michael Hartnett called “steady pessimism” among investors.

Bank of America attributed this month’s improvement to greater optimism about China’s economy, with 74% of respondents expecting China to fully reopen by the end of 2023.

Investors are still quite bearish on the global economy, but that negativity is showing signs of abating, according to Bank of America. (Source: Bank of America Global Survey)

Expectations of an outright recession also improved last month, with a net 68% of investors expecting the global economy to slip into recession next year, up from 77% in November.

“The softening of recessionary expectations was likely due to an improved outlook for China’s growth,” BofA said, noting a rise in the number of investors who see a stronger Chinese economy in 2023 to three-quarters of participants in a December survey of fund managers, up from 13% the previous month.

People in protective suits wait in a train station waiting room after the government eased restrictions to control the coronavirus disease (COVID-19), in Wuhan, Hubei province, China, December 11, 2022. REUTERS/Martin Pollard — People in protective suits at a railway station after the government eased controls over the COVID-19 in Wuhan, Hubei province, China, December 11, 2022. REUTERS/Martin Pollard

While bears remained broadly near record levels, Bank of America’s gauge of investor sentiment showed other bright spots.

In particular, a record 90% of allocators believe that global inflation will decrease in the next year. Consensus expectations have the US consumer price index (CPI) falling to 4.2% over the next 12 months.

Expectations of lower inflation fueled expectations of lower short-term interest rates, with the largest number of investors (42%) calling for a cut in short-term yields from March 2020.

Meanwhile, the federal funds rate — or the Federal Reserve’s key short-term interest rate — is widely expected to peak at 5% in the second quarter of 2023.

The level of investor money, which is usually elevated during periods of market volatility and economic uncertainty, fell to 5.9% from 6.2% in the previous survey. Forecasts of a fall in the U.S. dollar, which has hit a two-decade high this year, jumped to the highest level since 2006.

Despite this, investor resistance to equities persisted in November. In December, for the first time since 2009, investors had a net 10% surplus in bonds.

Investors are overweight bonds for the first time in 13 years, according to Bank of America. (Source: Bank of America Global Survey)

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Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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