Fund managers' cash in November remains high. This is bullish.
However, allocations to equities have jumped to 6-month highs. This is not surprising given the strong rally, and there is room for allocations to rise further before becoming contrarian bearish. But the big tailwind to higher equity prices has mostly passed. This is now neutral.
The biggest concern is that fund managers are very overweight "risk on" sectors: allocations to banks and technology are close to all-time highs. This looks crowded. Meanwhile, allocations to defensive sectors, like staples, are still low.
Regionally, allocations to the US and emerging markets are at low levels from which they normally outperform on a relative basis. This is especially surprising for the US given how strongly that region has outperformed over the past 7 months. Allocations to Europe are the second highest ever, conditions under which the region would usually underperform.
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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. We did a recap of this pattern in December 2014 (post).
In September, fund managers held 6-year high levels of cash and 3-year low levels of equities: a strong contrarian buy signal. The US and emerging markets were especially underweighted. Since then, SPX is up 7% and EM is up about 6% (post).
Let's review the highlights from the past month.
Fund managers cash levels slipped to 4.9% after being over 5% four months in a row, the first time it had been this high for this long since late-2008 and early-2009. This was an extreme that is normally very bullish for equities, and it was this time too (green shading). The decline in cash this month was not significant. Cash allocations remain bullish.
Fund managers are +43% overweight equities, a 6-month high and a big jump from +17% overweight in September (the lowest equity allocation since 2012). A lot of the tailwind from the lows has passed. Over 50% would be considered contrarian bearish (green line). Given the rise in equities since August, current levels are not surprising. Overall equity allocations are now neutral.
US exposure increased to -6% underweight in November. Despite low exposure, US equities have outperformed the past 7 months. US equities have been under-owned and should continue to 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 now back near those highs, at +58% overweight. This is 1.6 standard deviations above the long term mean. Judging from 2006, European equities are at risk of underperforming.
Allocations to Japan dropped to a 15 month low in September; allocations are only marginally higher now (+28% overweight). But this is 0.9 standard deviations above the long term mean. Prior to September, allocations the past 10 months were the highest since April 2006.
Emerging markets exposure dropped to the 3rd lowest ever (-31% underweight); September was the all-time low. 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. The region is up about 6% in the past two months, and no longer underperforming.
Fund managers are -59% underweight bonds, a fall from -41% in October. 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 slightly outperformed in the past 7 months.
The drop in allocations to bonds comes as fund managers have become more optimistic about the global economy. At the recent bottom in equities, macro optimism was at a 3 year low.
Allocations to commodities were unchanged at -23% underweight. This is 1.3 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.
Managers remain overweight the highest beta equities (technology, discretionary, banks). The largest underweights are in commodities (including energy and materials) and defensives, like staples.
Fund managers' allocation to banks is the third largest ever, 1.8 standard deviations above the mean. It's a small sample, but banks have underperformed in the past when this overweight.
Fund managers' allocation to technology is the second largest ever, 1.6 standard deviations above the mean. Tech underperformed when it was this overweight in mid-2010.
In the US, banks, tech, pharma (biotech) and discretionary are the most favored sectors. This has been the case for many months. Utilities, staples, telecoms (defensives) remain underweighted, with energy.
In summary: Fund managers are still overweight cash but their equity allocations have jumped to a 6-month high. The big tailwind to higher equity prices from September and October has mostly passed. The US and EM equities remain very underweight relative to Europe and Japan. High allocations to cyclicals (tech, banks, discretionary) are the biggest concern. If fund managers are again right about the dollar, it might be ready to turn lower.
Survey details are below.
- Cash (4.9%): Cash balances dropped to a still high 4.9% from 5.1%. July and September (5.5%) were the highest cash levels 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 (+43%): A net +43% are overweight global equities, up from a contrarian bullish +17% in September and +26% in October. Over +50% is bearish. A washout low (bullish) would be under +15-20%. More on this indicator here.
- US (-6%): Exposure to the US increased from -10% to -6% underweight. It was -19% underweight in May, the lowest since January 2008.
- Europe (+58%): Exposure to Europe increased to +58% overweight (2nd highest ever) from +54% overweight in October.
- Japan (+28%): Exposure to Japan increased to +28% overweight from +24% in October. Funds were -20% underweight in December 2012 when the Japanese rally began.
- EM (-31%): Exposure to EM decreased to -31% underweight (3rd lowest ever) from -28% in October. It was -34% underweight in September, the lowest in the survey's history.
- Bonds (-59%): A net -59% are underweight bonds, a fall from -41% in October. For comparison, they were -38% underweight in May 2013 before the large fall in bond prices.
- Commodities (-23%): A net -23% are underweight commodities, unchanged from October. September (-32% underweight) was a 28-month low. Low commodity exposure goes in hand with low sentiment towards EM.
- Macro: About 30% expect a stronger global economy over the next 12 months, a big jump from October's 13%, 3 year low.
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