Quick Bites – The “tail risks” we should note

We monitor Bank of America’s Survey of Global Fund Managers to understand the trends and themes influencing the ways global fund managers invest. The chart below, taken from their February pack, identifies the top “tail risks” they are concerned about. “Tail risks” can be defined as the chance of a loss occurring due to a rare event, as predicted by a probability distribution.

Source: Bank of America, Survey of Global Fund Managers, Feb 2023


The biggest tail risk worrying fund managers is inflation staying higher than expected. At present, long-term and medium-term bonds in developed economies are fairly hopeful of inflation falling steadily over this year and next, to be back within the target band or close to it by early 2026. Most fund managers expect the US Fed funds rate to peak at 5.25%. A significant disruption to that narrative could force central banks to push rates even higher and share markets to fall.

Their second largest concern is worsening geopolitical tensions such as the war in Ukraine or tension with China. Recent activity over the Chinese spy balloon and its shooting down have exacerbated the already deteriorating relationship with China and led to more Chinese companies being blacklisted by the US government. The war in Ukraine is poised to pick up in activity post the winter lull, with Russia determined to consolidate its holdings in the east, and Ukraine racing to obtain western tanks and artillery with which to defend itself.

Fears of a deep global recession have lessened over the past month, with several global banks and brokers reducing their expectations of recession in either the Eurozone or the US. Recession fears in the US peaked in November 2022 at 77% and have since declined to 24% this month, the lowest since June 2022. The Eurozone has positively surprised with its resilience, despite Russia using oil and gas supply to pressure allied support of Ukraine.


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