Inflation is now the top tail risk worrying fund managers – replacing COVID-19 for the first time since February 2020

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Markets are increasingly concerned that inflation could whack stocks

Coronavirus has been the main “tail risk” worrying investors since it started to spread rapidly around the world in February 2020.

But not any more. Fund managers now think higher-than-expected inflation would be the biggest danger to the market, followed by a sharp bond sell-off, according to the Bank of America fund manager survey for March.

It showed that 37% of the 197 respondents – who manage $597 billion between them – said higher inflation was the main threat that could damage markets. Meanwhile, 35% said a “tantrum” in the bond market was their chief concern.

The change in fund managers’ views reflects the rollout of coronavirus vaccines and expectations of strong economic growth in 2021, powered by government stimulus.

Growth expectations have in turn driven up inflation forecasts and bond yields, making stocks look less attractive and worrying many investors.

Nonetheless, Bank of America analysts led by Michael Hartnett said the survey results were “unambiguously bullish.”

They found that 48% of investors said the global economic recovery will be V-shaped – that is, featuring an economic rebound almost as rapid as the crash seen in 2020.

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The belief that growth will be strong is triggering a major switch in investment strategies, with investors cutting their exposure to tech stocks at the fastest rate in 15 years, BofA said.

The net percentage of asset allocators saying they are “overweight” on tech stocks fell to its lowest since January 2009.

A record 52% of fund managers now think value stocks – such as banks, energy firms and retailers – will outperform growth stocks in the next 12 months.

This rotation has already made itself felt in the stock market, with the Russell 2000 index of smaller companies up around 19% for the year, compared to a roughly 4% increase in the tech-heavy Nasdaq.

On bonds, investors said a rise in the key 10-year US Treasury yield to 2% would cause a 10% correction in stocks. It stood at 1.6% on Tuesday, having risen from around 0.92% at the start of the year. Yields move inversely to prices.