The global economy has entered a “Goldilocks” phase, with strengthening global growth and low inflation set to support stocks, industrial metals and cyclical currencies in the period ahead.
That’s the view from the latest Bank of America Merrill Lynch (BAML) Fund Manager Survey for October with a majority of investors expecting above-trend growth and below-trend inflation to persist over the next 12 months.
As seen in the chart below, the “Goldilocks” economic scenario is now expected by 48% of fund managers over the next year, replacing the below-trend growth and inflation view, known as “secular stagnation”, as the most popular expected outcome for the first time since March 2011.
The global economy, according to these influential fund managers, is now officially deemed to be awesome.
No wonder risk assets have enjoyed a strong period in 2017, with expectations of strengthening growth and low inflation helping to spur on market gains.
The latest survey canvassed the views of 207 panellists who manage a combined $US585 billion between them.
Mirroring the outcome of that question, a net balance of 41% of fund managers said they expect faster global growth over the next 12 months, the highest proportion seen since May this year.
While things are looking peachy for the moment, the question that naturally has to be asked is what, if anything, could upset the economic recovery?
This final chart from the survey provides some clues, measuring the largest “tail risks” for markets as we approach year-end.
A policy mistake from the US Federal Reserve or the European Central Bank (ECB) is seen to be the largest risk for markets among fund managers, an understandable outcome given the Fed is about to start reducing the size of its balance sheet while the ECB is likely to announce a tapering of asset purchases at its October policy meeting.
The predictability of central bank policy in recent years has been widely cited as a factor that has reduced financial market volatility, which, along with strengthening and coordinated economic recovery and other factors, has allowed risk assets to flourish.
A policy mistake narrowly edged out North Korea as the largest risk for markets, reversing the order seen in the previous survey in September.
A crash in global bond markets was deemed to be the third-largest risk for markets, an outcome that would almost certainly be linked to a policy mistake from the Fed or ECB.
Combined, central bank-induced bond crash is clearly regarded as the largest threat at present.