Overall, fund managers remain very bullish on risk. In September, exposure to global equities was the second highest since the survey began in 2001; it is only marginally lower now. What is particularly remarkable is how long managers have been highly overweight equities (virtually all of 2013). This is longer than any period during the 2003-07 bull market.
Meanwhile, the spread between exposure to fixed income and equities (118 percentage points) is among the widest ever (chart from Short Side of Long).
Fund managers are not just overweight equity and underweight bonds, they are overweight the highest beta equity (tech, banks, discretionary) and underweight defensives (telecom, staples, pharma) as well as cash.
Their current exposure to banks (+17%) is the highest since 2006 while their exposure to staples is the lowest since 2004. Exposure to tech is the highest since February 2011 and exposure to energy (-14%) is the third lowest ever.
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 have their largest overweight position in Eurozone equities, up more than 170% since August. Says BAML: “Belief in the European recovery has reached a stretched level, leaving markets vulnerable to profit taking as portfolio managers seek uncrowded alternatives.”
Exposure to Japanese equities is now the highest since May 2006. Short Yen is one of BAML three most crowded trades right now.
BAML's two other most crowded trades right now are long SPX and long high yield.
Emerging markets had been outperforming SPX over the past several months while managers were 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. Performance dropped to parity again in November and December with fund managers now back to 10% underweight.
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 (+4.5%): Cash balances remained 4.5% (4.4% in October; 4.5% in August; 4.6% in November, September and July). 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. More on this indicator here.
- Equities (+54%): A net 54% are overweight global equities (+1 standard deviation above 10 year average). It had been up every month since May, but, after reaching the second highest equity weighting ever in September, it unsurprisingly declined in October to 49%. It has now increased two months in a row. In comparison, it was 35% in December 2012 when the rally was still young. More on this indicator here.
- Bonds (-64%): A net 64% are now underweight bonds (-1.2 standard deviation below 10 year average), a slight improvement from November. It was -69% in November, tied with April 2006 for the lowest reading ever. For comparison, they were 38% underweight in May.
- Regions:
- Europe (+43%): Europe is the most preferred region. Managers are 43% overweight, a huge increase from 3% overweight in July and 8% underweight in May and April. It was 46% overweight in October, the highest weighting since June 2007. BAML: “Belief in the European recovery has reached a stretched level, leaving markets vulnerable to profit taking as portfolio managers seek uncrowded alternatives.” 83% of fund managers say European macro will improve in the next 12 months.
- Japan (+34%): Managers are 34% overweight Japan, a big increase from 24% in November, and now the highest weighting since May 2006. Funds were 20% underweight in December when the Japanese rally began.
- US (+7%): Managers were neutral on the US in October, a big drop from 30% overweight in August, but this increased to 7% overweight in November, where it remains in December. August was the third highest US weighting ever. BAML: Long SPX is one of the three most crowded trades right now.
- EEM (-10%): Managers are back to 10% underweight EEM (-1.8 standard deviation below 10 year average). It had increased two months in a row (it was 10% underweight in October and 1% overweight in November). EM 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.
- Commodities (-31%): Commodities were a record 32% underweight in June (vs 1% underweight in February), but this was reduced to 24% underweight in November. The current 31% underweight is the third lowest on record and goes in hand with skepticism over EEM.
- Currencies: 75% of managers believe the US dollar is undervalued, the highest proportion with this view since August 2008. Conversely, BAML calls short Yen one of the three most crowded trades right now.
- Macro: More than 71% expect a stronger global economy over the next 12 months. This compares to just 40% in December 2012, on the eve of the current rally
