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.
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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.
Fund managers are +41% overweight equities (flat from last month). While much has been made about high cash levels signifying risk-aversion, current equity allocations are slightly above the long term mean. This is therefore neutral. A washout low, with investors showing fear, would take place with equity allocations under 15-20%.
US exposure was -14% underweight in August, a big drop from -7% underweight in June. Despite low exposure, US equities have outperformed the past 4 months. US exposure has only twice been lower than in August in the past 8 years. US equities are under-owned and should outperform those in Europe and Japan on a relative basis (see below).
Eurozone exposure was +60% overweight in March, the highest in the survey's history. It is still high, at +47% overweight. This is 1.3 standard deviations above the long term mean. Judging from 2006, European equities are at risk of underperforming.
Eurozone exposure was +60% overweight in March, the highest in the survey's history. It is still high, at +47% overweight. This is 1.3 standard deviations above the long term mean. Judging from 2006, European equities are at risk of underperforming.
Allocations to Japan also stayed near the highs of the last few months (+40% overweight). Allocations the past 10 months haven't been this high since April 2006. This is 1.3 standard deviations above the long term mean. The region has outperformed.
Emerging markets exposure dropped to an all-time low of -32% underweight. Fund managers have been right to underweight this region, but current allocations are an extreme comparable only to early 2014, from which the region began to strongly outperform for the next half a year.
Fund managers have been prescient in judging the dollar to be overvalued. That is their current view (the other times were 10/04, 11/08, 6/10 and 6/12). Each time, emerging markets (solid line) rallied by an average of 8% over the next 3 months.
Those periods where the dollar was considered overvalued are shown below (lines).
Fund managers remain -59% underweight bonds (unchanged), almost 1 standard deviation below the long term mean. Bonds continue to be the most underweighted asset class and this, in large part, explains why cash balances have not been lower that 4.5% in two years. Fund managers have been right to be underweight bonds, but note that bonds have outperformed in the past 3 months.
Allocations to commodities fell to -28% underweight from -11% underweight in June. This is 1.7 standard deviations below the long term mean. The low allocation to commodities goes together with pessimism towards emerging markets and also explains why cash balances are high.
Globally, managers are not just overweight equity and underweight bonds, they are overweight the highest beta equities (technology, discretionary, banks). The largest underweights are in staples and commodities (including energy and materials).
Fund managers' global overweight in discretionary stocks and banks are 1.8 and 1.5 standard deviations above the mean, respectively. Recall that the global overweight in banks was the highest in the survey's history last month.
In the US, pharma (biotech), discretionary, banks and tech are the most favored sectors. This has been the case for many months. Utilities, staples, telecoms (defensives) remain underweighted, with energy.
In summary: While the high levels of cash are normally very bullish, it's not accurate to say that it represents fear on the part of fund managers. In the past two months, global equity allocations have increased, as have their allocations to higher-risk cyclicals. Cash is low because allocations for emerging markets, US equities, commodities and bonds are very low.
Survey details are below.
- Cash (+5.2%): Cash balances fell back to 5.2% from 5.5%. July was the highest level since December 2008. 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 (+41%): A net +41% are overweight global equities, essentially flat from +42% in July. This is slightly above the mean and thus neutral. Over +50% is bearish. A washout low (bullish) would be under +15-20%. More on this indicator here.
- Regions:
- US (-14%): Exposure to the US dropped from -7% to -14% underweight. It was -19% underweight in May, the lowest since January 2008. For comparison, it was +24% overweight in January.
- Europe (+47%): Exposure to Europe rose to +47% overweight from +40% overweight in July.
- Japan (+40%): Managers are +40% overweight Japan, a small increase from +37% in July. Funds were -20% underweight in December 2012 when the Japanese rally began.
- EEM (-32%): Managers dropped their EEM exposure to -32% underweight from -22%. This is the lowest in the survey's history.
- Bonds (-59%): A net -59% are now underweight bonds, essentially flat from -60% in June. For comparison, they were -38% underweight in May 2013 before the large fall in bond prices.
- Commodities (-28%): Managers commodity exposure decreased further to -28% underweight from -22% last month and -11% underweight in June. This is a 20-month low and 1.7 standard deviations below the long term mean. Low commodity exposure goes in hand with low sentiment towards EEM.
- Macro: 37% expect a stronger global economy over the next 12 months, a 10 month low. January 2014 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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