What has been particularly remarkable is how long managers have been highly overweight equities (virtually all of 2013 and so far in 2014). This is longer than any period during the 2003-07 bull market (yellow shading). In September, exposure to global equities was the second highest since the survey began in 2001. In the past, after a massive overexposure, a washout low would be marked by an equity weighting under +10%.
In April, despite an 8% fall in Nasdaq and small caps, global equity allocations actually increased to +45% overweight.
In March, equity exposure appeared to fall substantially, but this was misleading. Allocations to Europe, the US and EMs were virtually unchanged. The exception was Japan, where fund managers halved their substantial exposure to a 12-month low. This accounted for all of the month over month decline in equity allocations in March. Japanese allocations fell further in April.
Emerging markets had been underperforming SPX over the past year. In the past month, EEM has strongly outperformed. In response, managers have increased their exposure to -13% underweight from -31% in March. This accounts for all of the increase in fund managers' global equity exposure in April.
In the world's largest equity market, the US, equity allocations were flat from March. Exposure is essentially neutral.
Europe has been the consensus long for 8 months in a row. Exposure decreased from March; however, at +30% overweight, Europe remains the favorite by more than 2:1 relative to the US or Japan.
Remarkably, although bonds have outperformed SPX so far in 2014, allocations to bonds actually decreased in April. Fund managers are still massively underweight.
Overall, fund managers remain strongly bullish.
Moreover, they are not just overweight equity and underweight bonds, they are overweight the highest beta equity (tech, banks, discretionary) and underweight defensives (telecom, staples, utilities). Managers increased their exposure to banks, industrials and energy in April.
In the past, when managers have been this overweight growth sectors like tech and banks, 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. While current (bullish) market psychology is biased towards high beta, lower beta is likely to outperform in the months ahead.
Survey details are below.
- Cash (+4.6%): Cash balances declined to 4.6% (it had been between 4.4% and 4.8% since July 2013). For comparison, it was 3.8% in January and February 2013 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 (+45%): A net +45% are overweight global equities, a rise from +36% in March and equal to levels in February. After reaching the second highest equity weighting ever in September (+60%), a washout low would be under +10%. More on this indicator here.
- Bonds (-55%): A net -55% are now underweight bonds, a decrease from -53% in March even though bonds have outperformed. In November, it was the second lowest ever (-69%). For comparison, they were -38% underweight in May 2013.
- Europe (+30%): Europe is the most preferred region for the 8th month in a row. Managers are +30% overweight a huge increase from +3% overweight in July and -8% underweight in May and April 2013; it declined from +38% in March. It was +46% overweight in October, the highest weighting since June 2007.
- Japan (+13%): Managers are +13% overweight Japan, a small decline from March. It was +30% in February and +34% in December, the highest weighting since May 2006. Funds were -20% underweight in December 2012 when the Japanese rally began.
- US (+12%): Managers were neutral on the US in October, a big drop from +30% overweight in August (the third highest US weighting ever), but this increased to +7% overweight in November and December and now again to +12% overweight in April.
- EEM (-13%): Managers are -13% underweight EEM, an increase from March (-31%) which was a new low since the survey began in 2001. It had increased two months in a row (-10% underweight in October, +1% overweight in November) before falling back to -15% underweight in January. EM had been the most favored region (overweight +43%) in February 2013.
- Commodities (-21%): Managers decreased their commodity exposure in April (from -18% underweight in March); they were -31% underweight in December, the third lowest on record. Low commodity exposure goes in hand with skepticism over EEM.
- Macro: 62% expect a stronger global economy over the next 12 months, unchanged from March (January was 75%, the highest reading in 3 years). This compares to just 40% in December 2012, on the eve of the current rally.