Fund managers fear a ‘systemic credit event’ as the biggest threat to markets: BofA

The most likely sources of a credit event, participants say, are US shadow banking, US corporate debt and real estate in developed markets.

The participants, who have $548 billion under management, were surveyed between March 10 and March 16, amid the banking panic when Silicon Valley Bank

SIVB

,
followed by Signature Bank

SBNY

,
collapsed.

In terms of interest rates, investors will see another 75 basis points of interest rate hikes from the Federal Reserve in this cycle, peaking at 5.25% to 5.5%. Nearly a quarter expect the European Central Bank to raise deposit rates by another 50 basis points. Nearly two-thirds (65%) say the Fed will not raise its 2% inflation target for the next 2 years. And nearly six in ten (57%) investors expect lower short-term interest rates over the next 12 months.

Read: Elon Musk says Fed should cut interest rates half a point after Bill Ackman calls for pause

BofA investment strategist Michael Hartnett said in the report that investor sentiment is close to “levels of pessimism seen at lows of the past 20 years” and the S&P 500 index

SPX

could see a bottom of 3,800 and investors should try to fade out any rallies when the index benchmark moves between 4,100 and 4,200.

The S&P 500 is down 3% over the past month and has gained nearly 3% year-to-date.

In addition, investor fears of a recession are stronger than last month. More than four in ten (net 42%) of fund managers say a recession is on the way in the next 12 months. As these concerns grow, more investors (55%) are urging companies to improve their balance sheets.

The survey also found that fund managers are more bullish on Eurozone equities than US equities, the most overweight they’ve been in Europe since October 2017.

Over the past month, investors have exited stocks in the banking, consumer and REIT sectors, the report said, but have dived into Eurozone stocks, commodities and bonds.