Rising Rates Eclipse AI Bubble as Top Investor Fear, BofA Survey Shows

Global fund managers grew more cautious in September, with rising bond yields overtaking an artificial intelligence bubble as their primary concern, according to the latest Bank of America Global Fund Manager Survey. The report shows investors increased their cash holdings, signaling a more defensive posture, while maintaining strong conviction in AI and semiconductor stocks as a top investment theme.

Shifting Risks and Cautious Positioning

The survey revealed a significant shift in perceived market threats. The proportion of managers identifying higher bond interest rates as the biggest "tail risk" jumped to 33%, up from 27% in August. Consequently, concerns about an AI bubble eased, with 28% of respondents citing it as the top risk, down from 32% the previous month.

Reflecting this cautious sentiment, average cash levels in portfolios rose to 3.9% from 3.5% in August. In terms of sector allocation, fund managers reported increasing their exposure to insurance, healthcare, and industrials while reducing positions in REITs, consumer staples, and communication services.

Economic Outlook and Crowded Trades

Expectations for global economic growth softened, with only 8% of managers anticipating a stronger economy, down from 14% in August. A "no landing" scenario remains the base case for 55% of investors, a slight dip from 56% previously, while 38% now expect a "soft landing."

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Despite the shifting risk landscape, the most popular investment strategy remained consistent. A majority of managers (53%) identified "long semiconductors" as the market's most crowded trade, unchanged from August. The second-most crowded trade was "short U.S. Treasuries," cited by 18% of respondents, aligning with the heightened concern over rising interest rates.

Asia Focus: Underweight China, Bullish on AI

Within Asia, investors remained cautious on China, with a net -15% of managers reporting an underweight allocation to mainland Chinese equities, a slight improvement from -18% in August. Japan, Taiwan, and South Korea remained the most favored markets in the region.

Even with the broad caution, foreign investors pinpointed specific opportunities within China, overwhelmingly favoring AI and semiconductors (55%). This was followed by state-owned enterprises (25%) and companies with strong share buyback and dividend policies (15%). As a hedge for their AI exposure, a growing number of managers (25%, up from 18%) said they were rotating into defensive sectors.