Ukraine crisis: Fund managers now see equity bear market in 2008-like gloom

Most investors now expect global equities to slump into a bear market this year as the growth outlook has tumbled to the lowest level since the 2008 financial crisis amid fears over the impact from the war in Ukraine. 

This is the takeaway of the latest Bank of America Corporation monthly global fund manager survey conducted in the week through March 10. While cash levels surged to the highest since April 2020, the early days of the Covid-19 pandemic, allocation to commodities jum­ped to a record and exposure to equities fell to the lowest in nearly two years. 

“Economic growth and profit expectations are recessionary,” BofA strategists led by Michael Hartnett wrote in a note to clients. 

Persistently high inflation readings, concerns that central banks will tighten policy more aggressively than previously anticipated, and Russia’s invasion of Ukraine have triggered a rout in global stock markets this year, with major indexes now deep into correction territory. This flurry of headwinds, which now also includes a flare-up in coronavirus infections from China to Germany, is raising fears that a downturn in equities will continue. 

While the allocation to equities dro­pped in March, BofA strategists point out that it’s not at “capitulation” levels yet. On an absolute basis, global fund managers are overweight US equities and underweight Eurozone stocks. 

“The recent disconnect between global growth and equity allocation is now being corrected by a significant decline in equity allocation,” BofA’s stra­tegists said. “That said, investors remain overweight stocks, not underweight; equity allocations are not at ‘recessionary’ close-your-eyes-and-buy levels.”

The fund managers surveyed by BofA see a Federal Reserve “put” to arrest the slide in the S&P 500 at 3,636 index points, implying a downside of around 13 per cent from current levels for the main US benchmark. In the absence of an expected Fed intervention, equity investors are rotating from banks and consumer discretionary stocks into technology, staples and utilities, and from small-cap to large-cap stocks, according to BofA. 

A combination of investor positioning and hawkish central bank policy means it’s “too early” for a contrarian buy call, said BofA strategists, who remain tactically and cyclically bearish.