Fund managers slammed the door shut after the horse bolted last week as they scrambled to reduce their exposure to risky equities, according to a survey of big investors.
The poll by Bank of America Merrill Lynch found a record increase in the number of investors who said they have bought protection against a sharp fall in equity markets – as a sharp fall in equity markets began. The balance of fund managers trying to cover their backs jumped from a negative reading of 50 to a negative reading of 30 in February.
The survey of almost 200 managers with $575bn (£416bn) assets under management was carried out last week as equity markets entered correction territory after a run of gains.
Some 70 per cent of the investors said they believe the economy is in "late cycle", indicating that the run of growth since the financial crisis may be threatened in the medium term. That was the highest since January 2008, before the effects of the financial crisis became clear.
Yet the managers expect much larger rises in the value of stocks, with the peak of the bull market pegged at 3100 points, a major increase from the current levels below 2,700 points.
The steep fall prompted a movement out of equities by managers, reflecting fears that rising inflation in big developed economies could see interest rates rise faster than previously thought. An inflation-induced bond crash was cited by 45 per cent of the managers surveyed at the top of the list of tail risks for the global economy, while fears over US central banks tightening monetary policy too quickly and the integrity of market structure remain major concerns.
Investors cut their bond allocations to the lowest since 1998, the survey found. Investors spurn bonds if inflation threatens to rise because rising prices diminish the real value of the income from future coupon payments.