Written by Norman Isaac Mwambazi

Bank of America: COVID-19 no longer the biggest worry for financial markets; here’s what is

Global stock markets have weathered through the hard times of the COVID-19 pndemic. There have been highs and lows, but …

Global stock markets have weathered through the hard times of the COVID-19 pndemic. There have been highs and lows, but the constant worry of compnies and investors has been the pandemic itself.

There is good news because this has changed. The worries of investors have shifted from COVID-19 to other things if the findings of the survey by the investment banking arm of Bank of America (BoA) are to go by.

For the first time in more than a year since the Wolrd Health Organisation announced that COVID-19 shifted from being an epidemic to a pandemic, fund managers do not see COVID-19 as the biggest risk for global markets to grapple with, the eye-catching finding of the latest monthly survey of fund managers carried out by Bank of America (BoA).

Since February last year, those participating in this influential survey have pinpointed coronavirus as the number one concern every single month but the latest survey, conducted among market professionals managing $597 billion worth of money, found that COVID-19 has dropped to the third position.

Now that COVID-19 is no longer worrying investors, you must be wondering what is the number one concern now. Wonder no more. The survey found that what is currently giving investors sleepless nights is higher-than-expected inflation, as identified by 37% of those polled.

This worry is understandable. Last week, US President Joe Biden signed into law a $1.9 trillion stimulus package as he seeks to promote growth in the US economy as it emerges from the pandemic. This is in addition to the $900 billion stimulus package that the Trump administration delivered in its last month in office.

The new stimulus package has raised concerns that the US economy, which stumbled during the pandemic by less than that of Japan or of major European economies such as Germany, the UK and France, may over-heat, with the supply of goods and services failing to keep up with demand.

This was the reason for the recent sell-off in US government bonds, or Treasuries, as inflation is the enemy of fixed-income securities.

The yield, which rises as the price falls on 10-year US Treasuries, hit 1.642% on Friday last week. This was its highest level since February 2020 and prior to the pandemic, having stood at 0.912% at the beginning of the year.

This is a big jump compared to the yield on the 10-year UK and Japanese government bonds, which currently stand at 0.781% and 0.1% respectively.

In Germany, the yield on 10-year Bunds is currently -0.344%, which means that an established trend in recent years of investors actually paying the German government for the right to lend to it is still continuing.

The rise in US Treasury yields shows one thing: Investors are demanding a premium for lending to the government.

According to Sky Business, the rise in US government bonds is not of itself a concern to the government when the Federal Reserve Bank is buying in $120 billion worth of assets each month most of which re in the form of US Treasuries as it continues with Quantitative Easing (QE).

The worry, as pointed out by fund managers in the BoA survey, is the speed with which the Fed may withdraw those purchases if it suspects that the US economy is running too hot or if inflation is about to rise.

Of those who polled for the survey, 35% saw a “taper tantrum” among investors as the next biggest risk to markets. This term describes a sell-off in US Treasuries inspired by the Fed withdrawing monetary stimulus.

This is likened to what happened in 2013 when the Fed indicated it would withdraw QE in response to signals that the US economy had fully recovered from the financial crisis.

Due to this, US Treasuries sold off aggressively, the US dollar rose and stock markets in emerging economies such as Turkey, Brazil, Indonesia, and South Africa, all of which have large amounts of dollar-denominated debt, fell sharply as overseas investors withdrew their capital.

The result of that was for the Fed to launch another round of QE and not actually tapering its bond purchases. Such tantrums, or the threat of them, have made it very puzzling for the Fed to withdraw monetary stimulus.

The current price of US Treasuries does not appear to be causing investors too much concern. 43% of those who responded in the BoA survey said that the 10-year US Treasuries yield would have to reach 2% in order to spark a 10% adjustment in stocks so we are not there yet.

Other points to note in the survey

Some 48% of investors believe the global economy is enjoying a “V-shaped” recovery, which is a straight bounce-back from the pandemic. Only 38% expected such an outcome in May last year. Fund managers remain incredibly bullish about stock markets.

89% of fund managers surveyed expect company profits to grow.

52% would prefer to see companies recycling those profits into their business by raising capital expenditure, rather than by returning it to shareholders via dividends and share buy-backs.

20% of investors said they were adopting higher risk levels than usual.

As striking is the finding that, despite the stunning performance of US stock markets during the last 12 months, only 15% of investors regard the US as a bubble.

25% of those polled still think this the early stages of a bull market while 55% regard it as the late stage of a bull market. That may not apply to tech stocks, though, with being “long” of tech stocks regarded as the “most over-crowded” trade.