Investor Sentiment Wavers Amid Dollar Strength and Growth Concerns

The January 2025 BofA Global Research Fund Manager Survey (FMS) highlights shifting investor sentiment, with global growth optimism taking a sharp hit. A net 8% of fund managers now expect weaker global economic growth over the next 12 months, a significant reversal from December when a net 7% anticipated stronger growth. This decline in sentiment was driven by reduced optimism about both U.S. and Chinese growth prospects. Inflation expectations also rose to their highest levels since March 2022, with only a net 7% of participants expecting lower inflation in the year ahead.

Investors are also preparing for changes in Federal Reserve policy, with 79% of respondents expecting rate cuts in 2025. The majority anticipate one to two cuts, while only a small fraction foresee three or more cuts. Conversely, just 2% of participants expect the Fed to hike rates further. These expectations reflect the broader debate around whether the U.S. central bank can effectively balance inflation control with economic growth.

Asset Allocation Trends and Cash Levels

Asset allocation saw notable shifts, with global equities and bonds experiencing outflows while commodities gained traction. A net 41% of fund managers were overweight equities, down from 49% in December, signaling a cautious approach. Bonds saw further reductions, with a net 20% underweight position compared to 15% underweight in the prior month. Meanwhile, commodity allocations improved, with only a net 6% underweight compared to 12% underweight in December. Real estate allocations fell further, with a net 9% underweight compared to 7% in December.

Cash levels held steady at 3.9% of assets under management, marking the second month in a row with a “sell” signal under BofA’s cash rule. Historically, this signal has been a bearish indicator for equities, with global markets delivering negative returns in the months following such signals. Cash allocations remained underweight at 11%, though less so than December’s 14%, suggesting a measured appetite for risk despite the weaker growth outlook.

Regional Positioning and Tariff Concerns

Regional equity allocations showed stark shifts, particularly in the U.S. and the eurozone. Allocation to U.S. equities fell to a net 19% overweight, down sharply from December’s record high of 36%. Conversely, eurozone equities saw a significant rebound, moving to a net 1% overweight from a net 25% underweight the previous month. Allocations to global emerging markets (GEM) and Japanese equities remained relatively stable, while UK equities slipped further into underweight territory.

Trade war concerns remained a key theme, with 28% of respondents identifying “trade war triggers global recession” as a top tail risk. This fear was second only to “inflation causes Fed to hike,” which topped the list with 41% of respondents. These risks underscore lingering investor unease about geopolitical instability and its impact on global growth.

Inflation, Crowded Trades, and Tail Risks

Inflation remains a central concern, with expectations for lower inflation continuing to fade. Rising inflation expectations have also influenced sentiment around crowded trades. The “Magnificent Seven” U.S. tech stocks (Apple, Microsoft, Amazon, NVIDIA, Alphabet, Tesla, and Meta) were deemed the most crowded trade for the third consecutive month, with 53% of respondents identifying this position as overly concentrated. Long U.S. dollar positions ranked second at 27%, up sharply from December, reflecting confidence in the dollar’s strength.

The biggest tail risks for investors were inflation-driven Fed rate hikes and trade wars, highlighting the precarious balance between monetary policy and global economic stability. These concerns also inform the broader allocation strategy, with investors tilting cautiously toward safer asset classes while remaining wary of underperformance in high-growth regions.

Conclusion: Navigating a Complex Landscape

The January 2025 BofA FMS paints a picture of cautious optimism tempered by macroeconomic uncertainties. While inflation expectations and rate cut hopes dominate sentiment, the dollar’s strength and geopolitical risks create a challenging backdrop for asset allocation. Equity allocations have moderated, particularly in U.S. stocks, while eurozone equities have gained favor. Commodity allocations are improving, signaling renewed interest in inflation hedges, though cash levels remain low, indicating measured risk-taking.

Key takeaways for investors include the need to monitor regional and sector-specific exposures, particularly for assets sensitive to currency movements and inflation. With inflation and trade concerns topping the list of tail risks, investors are adopting a more defensive posture, balancing long-term opportunities with near-term uncertainties. The divergence in sentiment between institutional and retail investors, as well as regional positioning shifts, underscores the complexity of navigating markets in a strong-dollar environment.