Fund managers are expecting inflation to rise over the next year as the mood towards the global economy coarsens.
Over 40 per cent of fund managers believe the global economy is set to weaken over the next 12 months, with US economic policy and weaker consumer demand seen as the largest forces dragging it down, according to the latest Bank of America European fund manager survey.
Just over a month ago, only 31 per cent thought the global economy would diminish, but Trump’s sweeping and erratic tariffs policies, and their disruption to the global trade order, has caused sentiment to sour.
Now, 58 per cent see the US administration’s policies as having a negative impact on growth while also causing inflation to rise, up from 52 per cent last month, reflecting growing worries of “stagflation”, a troublesome economic situation in which high inflation and unemployment coupled with a stagnant economy stifles growth.
Expectations for inflation to rise hit 18 per cent, its highest since May when the market was dealing with the fallout of Trump’s announcement of tariffs.
A trade war triggering a global recession remains the biggest risk for causing significant losses in the market for investors, but a growing number are also concerned stubborn inflation could thwart a slash to interest rates by the Federal Reserve in September.
Hope in Europe
While the attitude towards global markets worsen, 35 per cent of respondents are expecting to see stronger European growth over the coming year.
Similarly, 23 per cent see scope for European inflation to decline over that period, showing hope for the market amid global turmoil.
Many believe Germany’s recent fiscal stimulus, which is anticipated to boost its stagnant economy, will be the main driver for the economy and remains the most popular among investors.
Switzerland has become increasingly unpopular in the wake of Trump slapping the country with a 39 per cent tariff.
Over 10 per cent believe the European Central Bank easing the Eurozone economy will be a leading factor in boosting European growth by lowering costs and injecting capital into banks.
Be bullish
While fund managers remain sceptical of European equities in the short term, believing tariff shocks are not yet over, many respondents are bullish for equities long term potential.
Almost nine in ten respondents are optimistic in the long run for Europe equities, with financials expected to be the best performing sector, with insurance close behind.
On the other hand, respondents believe auto and retail will ultimately under perform in the market.