Here's a brief recap of the past several months:
In July, fund manager equity allocations reached a bullish extreme. At +61% overweight, it was the second highest since the survey began in 2001, a clear risk to near-term equity performance (post).
By August, the Euro 350 dropped 8% and SPX dropped 5%. In response, equity allocations fell and cash shot up to 5.1%, a high level associated with lows in equities (post).
In September, equities in the US hit new highs; Europe rallied, but fell short of new highs. Fund managers raised their global equity exposure and reduced their cash (post).
It hasn't happened.
In October, fund manager cash has moved higher, to 4.9%, but this is less than it was in August. Instances are very low, but over 5% represents bearish sentiment. There's room for cash to rise further.
Global equity exposure is now +34% overweight. As we have continually noted, what has been remarkable is how long managers have been highly overweight equities (virtually since the start of 2013). This is longer than any period during the 2003-07 bull market (yellow shading). In the past, after overexposure like that seen in the past 22 months, a washout low would be marked by an equity weighting under +15-20% (green shading). By that measure, equities are over owned. But a washout low on further weakness could now occur in the next month.
The biggest surprise in September was that fund managers dropped their US equity exposure to just +1% overweight. Given how strongly the US has outperformed the rest of the world in the past several years, that exposure was surprisingly low. The US was under owned. In October, exposure jumped to a 14 month high of +17% overweight. There is room for exposure to rise further, to +20-30%.
Europe had been the consensus long for 11 months in a row. Exposure in June was +43% overweight, the second highest weighting since June 2007. Since then, the region has strongly underperformed. Allocations dropped in October to +4%, a 15 month low. There is room for exposure to fall further.
Managers were -31% underweight EEM in March. This was a strong contrarian buy. In the ensuing months, the region strongly outperformed. In August, allocations increased to +17% overweight, the highest in 17 months. As we noted then, the fat pitch had passed. Exposure is now back to -5% underweight. This is where bottoms form, but, in the past, it has taken more than one month of being underweight for a solid low to be put in.
Remarkably, although US bonds have outperformed SPX so far in 2014, fund managers are still -53% underweight. In July, exposure fell to their lowest in more than 6 months. It's not much higher now. Bonds continue to be the most hated asset class and this, in large part, explains why cash balances have not been lower that 4.4% in the past year. For comparison, managers were -38% underweight in May 2013 before the large fall in bond prices. There is room for bond exposure to rise further.
That is equally true in the US. Tech is the most favored sector, followed by pharma and banks. Utilities, staples and telecoms remain very underweighted. A big change from last month is that industrials and energy are now underweight.
Since the August 7 low, tech has underperformed while both utilities and staples, two of the least liked sectors, have outperformed. Among cyclicals, only banks have outperformed.
Energy has been the obvious loser. Of note is that global fund managers are now at an extreme underweight relative to tech and banks. This is a contrarian investment.
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 2013, and it was the worst performer that year. In comparison, they were 20% underweight Japan in December 2012 and it was the best equity market in 2013. The underweights now are energy, defensive sectors and bonds.
Survey details are below.
- Cash (+4.9%): Cash balances rose to 4.9% from 4.6% in September. 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 (+34%): A net +34% are overweight global equities, down from +47% in August. In July it was +61%, the second highest since the survey began in 2001. A washout low would be under +15-20%. More on this indicator here.
- Bonds (-53%): A net -53% are now underweight bonds, a minor increase from -64% in July, the lowest weighting in more than 6 months. For comparison, they were -38% underweight in May 2013 before the large fall in bond prices.
- Regions:
- US (+17%): The current weighting is a 14 month high, up from just +1% in September. They had been +30% overweight in August 2013 (the third highest US weighting ever).
- Europe (+4%): Before August, Europe had been investors' most most preferred region for 11 months in a row. The +46% overweight in October 2013 was the region's highest weighting since June 2007. Current exposure is a 15 month low.
- Japan (+32%): Managers are +32% overweight Japan, a 10 month high. Funds were -20% underweight in December 2012 when the Japanese rally began.
- EEM (-5%): Managers decreased their EEM exposure to -5% underweight, from +17% overweight in August. This is where bottoms form, but, in the past, it has taken more than one month of being underweight.
- Commodities (-20%): Managers decreased their commodity exposure to -20% underweight. With the exception of August, it has been less than -15% since early 2013. The decline in commodity exposure goes in hand with reduced sentiment in EEM.
- Macro: 32% expect a stronger global economy over the next 12 months, an decrease from 69% in July. January was 75%, the highest reading in 3 years. This compares to a net -20% in mid-2012, at the start of the current rally.
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