Every month, we review the latest BAML survey of global fund managers. Among the various ways of measuring investor sentiment, this is one of the better ones. These managers oversee a combined $700b in assets.
Overall, fund managers are increasingly bullish on risk. In July, they further reduced their exposure to bonds (55% underweight) and increased their exposure to equities. In fact, what is remarkable is that equities corrected 8% over the past two months yet equity exposure increased by 9 percentage points, to 52% overweight. Generally, you don't want to see an increase in bullish sentiment as prices fall; that is the definition of complacency.
Managers are now overweight the US equities by 29%, an increase of 4 percentage points in the last month. They were 3% underweight the US in January, for comparison. Managers increased Japan to 27% overweight. They are just 3% overweight Europe. Meanwhile, emerging markets are now 18% underweight, the lowest since the survey began in 2001.
You can see from the data that it should be looked at from a contrarian perspective. Fund managers were overweight EEM more than any other market at the start of the year, and it has been the worst performer so far. They are now bearish EEM, so keep it on your radar. In comparison, they were 20% underweight Japan in December and it has been the best equity market by far in 2013. The US is now the largest consensus long.
Survey details are below.
- Cash (4.6%): Cash balances rose to 4.6% from 4.2% in June (vs 3.8% in January and February). Typical range is 3.5-5%. BAML has a 4.5% contrarian buy level but we consider over 5% to be a better signal. The increase in cash reflects the reduction in bond exposure. More on this indicator here.
- Equities (+52%): A net 52% are overweight global equities, a 9 percentage point increase from May (it peaked at 57% in March, the second highest equity exposure since the survey began in April 2001. In comparison, it was 35% in December 2012 when the rally was still young). More on this indicator here and see chart below.
- Bonds (-55%): A net 55% are now underweight bonds, an increase from 38% in May. In June, 81% expected long term rates to rise over the next 12 months, the highest level recorded by the survey since 2004.
- Regions:
- US (+29%): Managers are 29% overweight the US (an increase from 25% in June, 20% in May and April, 14% in March and 3% underweight in January). This is the highest weighting in more than 14 months.
- Japan (+27%): Managers are 27% overweight Japan, an increase from 17% in June. This is now close to the 31% overweight in May, which was the highest since 2006 (vs 20% underweight in December when the Japanese rally began).
- Europe (+3%): Europe was 3% overweight in July, an increase from 8% underweight in May and April but a decline from 6% overweight in June.
- EEM (-18%): EEM had been the most favored region (overweight 43% in February) but this fell to +3% in May, and further to 9% underweight in June and now 18% underweight in July, the lowest since the survey began in 2001. 44% say it has the worst profit outlook of any region in the world. For China in particular, 65% do not expect its growth to strengthen in the next 12 months; for comparison, in December, 67% expected growth to strengthen in the next 12 months.
- Commodities (-26%): Commodities were a record 32% underweight in June (vs 1% underweight in February), but this was reduced to 26% underweight in July. The commodity weighting goes in hand with skepticism over China and EEM.
- Currencies: 83% expect the dollar to rise in value over then next 12 months. This is the largest bullish position on the dollar since the survey began.
- Macro: 52% expect a stronger global economy over the next 12 months, up 4 percentage points since May.
A net 52% of fund managers are overweight global equities, a 9 percentage point increase from May. Over 50% represents a high level of bullishness.
Managers are 29% overweight the US (an increase from 25% in June, 20% in May and April, 14% in March and 3% underweight in January). This is the highest weighting in more than 14 months (blue line). Over 30% has been the historical top weighting (mid 2008, late 2010 and early 2012).
