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 as the results reflect how managers are positioned in various asset classes. These managers oversee a combined $700b in assets.
Overall, fund managers remain very bullish on risk (or, as BAML puts it, "steadfastly optimistic, undisturbed by events in DC"). In September, exposure to global equities was the second highest since the survey began in 2001, while exposure to fixed income was at the second lowest ever.
Remarkably, with US equities having fallen 5% in the interim, manager's equity exposure (49% overweight) is still about 1 standard deviation above the 10 year mean. And although treasuries have performed as well as equities over the past 10 weeks, managers remain highly under-exposed to fixed income (58% underweight).
Within equities, managers are positioned for capital appreciation. Overall, their exposure to tech is the highest of any sector; for industrials, it is near the highest of the past decade. Conversely, their exposure to lower growth (but income-producing) consumer staples reached a 7-year low in October. In sum, manager's are positioned long beta, clearly expecting upside momentum from equities to continue.
In the past, when managers have been this overweight growth sectors like industrials, those sectors have underperformed until their exposure has been reduced. Conversely, when their exposure to safer, income producing sectors like consumer staples has been this low, those sectors have outperformed. So, while current (bullish) market psychology is biased towards high beta, lower beta is likely to outperform in the months ahead.
Managers now have their largest overweight position in Eurozone equities, up more than 170% since August. US equities had been the preferred region the past several months, but exposure was reduced first due to taper fears and then debt ceiling fears.
Emerging markets have been outperforming SPX over the past 3 months while managers are still 10% underweight. Exposure to emerging markets in August, when the rally was still getting started, was the lowest since the survey began in 2001.
You can see from the data that it should mostly 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 was the worst performer until August. In comparison, they were 20% underweight Japan in December and it was the best equity market by far through May. Now, the big overweight is in Europe.
Survey details are below.
- Cash (+4.4%): Cash balances remained 4.4% (4.5% in August; 4.6% in July and September). For comparison, it was 3.8% in January and February when the rally was getting started. Typical range is 3.5-5%. BAML has a 4.5% contrarian buy level but we consider over 5% to be a better signal. BAML Chief Investment Strategist Hartnett says: "Aversion to fixed income explains still elevated cash levels." More on this indicator here.
- Equities (+49%): A net 49% are overweight global equities. It had been up every month since May, but, after reaching the second highest equity weighting ever in September, it unsurprisingly declined in October. In comparison, it was 35% in December 2012 when the rally was still young. More on this indicator here.
- Bonds (-58%): A net 58% are now underweight bonds. In September, it reached the lowest weighting (-68%) since April 2006 and the second lowest since the survey began. For comparison, the current 58% underweight is still lower than the 38% underweight in May and 57% underweight in August.
- Regions:
- Europe (+46%): Europe is the most preferred region. Managers are 46% overweight, a huge increase from 3% overweight in July and 8% underweight in May and April. This is the highest weighting since June 2007. Says BAML: "This is an extreme overweight."
- Japan (+30%): Managers are 30% overweight Japan, an increase from 17% in June. Funds were 20% underweight in December when the Japanese rally began.
- US (neutral): Managers are neutral on the US, a big drop from 30% overweight in August and the lowest since January of this year. August was the third highest US weighting ever. BAML: "Shenanigans in DC have clearly induced rotation from US to EZ equities."
- EEM (-10%): 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 19% underweight in August, the lowest since the survey began in 2001. September was the first increase since February.
- Commodities (-28%): Commodities were a record 32% underweight in June (vs 1% underweight in February), but this was reduced to 16% underweight in September. The current 28% underweight is the 4th worst on record and goes in hand with skepticism over EEM.
- Macro: 54% expect a stronger global economy over the next 12 months.
- Europe (+46%): Europe is the most preferred region. Managers are 46% overweight, a huge increase from 3% overweight in July and 8% underweight in May and April. This is the highest weighting since June 2007. Says BAML: "This is an extreme overweight."
- Japan (+30%): Managers are 30% overweight Japan, an increase from 17% in June. Funds were 20% underweight in December when the Japanese rally began.
- US (neutral): Managers are neutral on the US, a big drop from 30% overweight in August and the lowest since January of this year. August was the third highest US weighting ever. BAML: "Shenanigans in DC have clearly induced rotation from US to EZ equities."
- EEM (-10%): 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 19% underweight in August, the lowest since the survey began in 2001. September was the first increase since February.
