Summary: Overall, fund managers' asset allocations in August provide conflicting views on sentiment.
On the one hand, fund managers'
cash remains at the highest levels since the 2011 and 2012 equity lows and the panic in 2008-09. This is normally contrarian bullish.
However,
allocations to equities rose over the past two months and are above the mean. Cash levels are high because fund managers are underweight emerging markets, US equities, commodities and bonds. In August, their exposure to European and Japanese equities increased.
Moreover,
fund managers remain very overweight "risk on" sectors: allocations to discretionary, banks and technology are well over their means. Allocations to defensive sectors, like staples, are near all-time lows.
Net, this is not the sentiment profile of investors who are fearful.
Regionally,
allocations to the US and emerging markets are at very low levels from which they normally outperform on a relative basis. The dollar is also considered highly overvalued, and BAML fund managers have been prescient in the past in calling turning points in the dollar.
* * *
Among the various ways of measuring investor sentiment, the BAML survey of global fund managers is one of the better as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b in assets.
The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal.
To this end, fund managers became very bullish in July, September, November and December 2014, and stocks have subsequently sold off each time. Contrariwise, there were some relative bearish extremes reached in August and October 2014 to set up new rallies. We did a recap of this pattern in December (
post).
Let's review the highlights from the past month.
Fund managers cash levels remained over 5% for a second month, the first time it's been this high for two months in a row since early 2009. This is an extreme and it's normally very bullish for equities (green shading). Note that cash levels haven't been much below 4.5% since early 2013.