BofA survey shows strongest European growth optimism since 2021

Investing.com -- European fund managers are the most upbeat on the continent’s growth outlook in more than four years, with optimism anchored in expectations of German fiscal support and a resilient global backdrop, according to Bank of America’s latest Fund Manager Survey (FMS).

A net 77% of respondents expect stronger European growth over the next twelve months, up sharply from 57% a month earlier and the highest reading since mid-2021. 

The surge in optimism comes as investors reassess regional catalysts. Confidence in Germany’s policy stance has strengthened, with 73% citing fiscal stimulus as the key driver of faster growth.

Meanwhile, European Central Bank (ECB) easing has fallen out of the list of major supports, replaced by expectations that global monetary conditions will turn more favourable.

A net 3% of global respondents now expect the world economy to strengthen, the first positive reading this year, and the share anticipating a “no-landing” scenario has climbed to 37%, the highest since January.

“Soft landing remains the majority view on global growth, but the no-landing camp continues to grow,” BofA strategists led by Andreas Bruckner said.

In terms of potential risks, strategists note that “investors are worried the weakening in the U.S. labour market,” which nearly two-thirds see as the biggest downside risk to global growth, though “not enough to demand action.”

“Higher-for-longer environment [is] still considered to be the dominant scenario for markets by 42% of respondents, ahead of stagflation at 27% and goldilocks at 19%, up from 7% last month,” the note highlighted.

The perceived threat from an AI-driven market bubble has also risen, with 45% calling it the top tail risk.

Still, expectations for core inflation have eased, and a net 27% see lower European inflation ahead, a marked increase from a net 0% last month.

European equity views have turned even more buoyant. A net 77% expect near-term upside and a record net 92% see gains over the next year. Earnings upgrades are believed to be the primary driver, cited by 77% of investors, and fears of missing a rally are rising.

The share of respondents concerned about cutting equity exposure too much has climbed to 39%.

On the positioning front, trends show a tilt back toward cyclicals. A net 31% expect cyclical stocks to outperform defensives, up from 18% previously, although enthusiasm does not extend to small caps, where expectations have swung to neutral.

Banks remain the biggest consensus overweight, followed by Utilities and Healthcare, while Retail, Media and Food and Beverages are the most under-owned.

Regionally, Germany remains the preferred equity market, ahead of Spain and Italy. France is the least favoured.

Cash levels among European investors have risen to 3.8%, while U.S. dollar bearishness has moderated on a global basis.