Investors flee banks, see more sell-off in Europe, and recession fears mount

Ha Eleftherias Cortalis

Concerns about the outbreak of systemic credit events amid the current turmoil caused by the banking sector in the markets lead to a renewed increase in recession risks, while most investors see a further decline in European stocks in the coming months.

European banks are seeing massive cuts in overweight positions held by investors and losing their “mastery” of portfolio strategies.

These are the results of a Bank of America survey of 244 investors and fund managers conducted March 10-16, after the Silicon Valley bank turmoil and before the UBS-Credit Suisse deal.

More specifically, 31% of respondents see a systemic credit event as the biggest risk to markets, up from just 8% last month, which has pushed inflation fears (25%, up from 40%) from first place in nine months. . Shadow banking in the US is seen as the most likely source of a credit event with 34% of funds.

At the same time, concerns about the negative effects of a higher interest rate environment on banks and the economy led to a reassessment of growth expectations. 53% of investors believe the European economy will weaken next year, up from 33% last month, with 61% expecting a recession in Europe within the next 12 months, up from 55% in February. 42% of investors expect a global recession, up from 24% last month.

66% expect growth to slow in the US in response to a sharp tightening in monetary policy, up from just 18% last month, with 63% expecting the same in Europe, up slightly from last month. Also, 84% of investors expect inflation to decline over the next 12 months, broadly unchanged from last month.

Investors are preparing for more selling

66% of respondents to the BofA survey see further declines in European stocks in the coming months, up from 53% last month. 71% see European earnings per share (EPS) falling in response to slower growth and higher margin pressures (although this is down from 77% last month), with 16% seeing European equities as overvalued (from 6% the previous month).

However, investors remain bullish in the medium term, seeing 55% rise in European stocks over the next 12 months, unchanged from last month. 45% consider the main risk for their portfolio to be a lack of adequate hedges, followed by a very slight drop in equity risk, at 26%. 19% of funds long positions in European stocks are the most “crowded” trade.

“ax” for overweight banks

As BofA notes, 34% of investors expect cyclical stocks in Europe to underperform defensive stocks in the coming months (up from 39% last month), while 66% expect high-quality stocks to outperform low-quality stocks, up from 71%. before.

Banks, which was the most popular sector with the largest overweights in Europe last month, saw significant site cuts, with overweights now up just 3%, down from 27% in the previous month. Technology topped fund preferences for the first time since December 2021, with 34% declaring overweight, up from 10% the previous month. The percentage that they are underweight in real estate jumped from 20% to 45%, making it the most “hated” industry in Europe.