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What do European fund managers think about growth, inflation and stock markets?

Shares in Spanish banks are on the list for potential investors
Shares in Spanish banks are on the list for potential investors Copyright Manu Fernandez/Copyright 2017 The Associated Press. All rights reserved.
Copyright Manu Fernandez/Copyright 2017 The Associated Press. All rights reserved.
By Piero Cingari
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Optimism among European fund managers surged in April due to rising economic recovery hopes. European equities have gained favour, though worries about central bank policies potentially triggering a market correction loom large.

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Investor sentiment about Europe's economic prospects has substantially improved, according to the latest Bank of America European Fund Manager Survey.

The survey, which polled 260 managers with assets under management totalling $719 billion (€578 billion) between 5 April and 11 April, shows that half of respondents now anticipate a stronger European economy over the next year - a steep rise from 21% last month, marking the highest level of optimism since July 2021.

However, 36% of the panel still foresee a slowdown, attributing it to the lingering effects of monetary tightening, though this figure has markedly decreased from 83% in January.

Inflation and interest rate expectations

While growth forecasts brighten, concerns over inflation persist. About 41% of fund managers view rising inflation as the most significant market risk, overtaking geopolitics.

Expectations of sticky inflation alongside robust growth could usher in a prolonged period of higher interest rates, a scenario 43% of respondents now anticipate, doubling the sentiment from last month.

While a majority of fund managers still expects a decrease in global core inflation over the next year, the proportion has dropped to 45% from 57% last month and 71% in January. This indicates growing apprehensions about sustained inflationary pressures.

In March 2024, annual consumer price inflation in the Eurozone was confirmed at 2.4%, according to Eurostat's final reading, equalling the 28-month low set in November 2023. However, recent data from the UK and the US indicates that last month's inflation rates there were slightly higher than anticipated.

Money markets are now forecasting approximately 80 basis points in rate cuts from the European Central Bank for this year, suggesting just over three quarter-percentage point reductions. This is a slight adjustment from the beginning of the month when markets anticipated four rate cuts.

European equities: Cautious optimism with a twist

Investor allocations to eurozone equities have surged, reaching a net 26% overweight, the most since February 2022.

However, confidence in near-term market gains has eased, with 52% expecting further rises, down from 64% last month. The prospect of hawkish central bank policies is seen as the primary risk, with 38% pinpointing it as a potential trigger for a market correction.

Sector preferences: Energy takes the lead

European energy has replaced technology as the sector with the largest consensus overweight.

Nearly half of fund managers predict gains for cyclicals over defensives, and 31% foresee value stocks outperforming growth stocks, a significant increase from 12% last month, supported by improving credit conditions and positive PMI data.

Regional preferences and banking sector prospects

Investor preferences among European countries fluctuate, with Spain and the UK currently leading as preferred markets, while Switzerland and Germany lag.

European banks have also caught investors' eyes, considered attractive by 52% of respondents due to higher profitability and strong cash yields. Conversely, technology, industrials, and consumer sectors appear overvalued according to the current sentiment.

This survey paints a picture of a cautiously optimistic investment landscape in Europe, with fund managers balancing growth hopes against potential monetary policy shifts and inflationary pressures.

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