Global allocations to equities dropped in half in the past month. Since 2009, equity allocations have only been lower in mid-2010, mid-2011, mid-2012 and mid-2015; all of these periods were notable lows for equity prices during this bull market. This is bullish for equities.
Allocations to US equities remain near an 8 year low, a level from which the US should continue to outperform as it has during the past 9 months. Europe remains very overweight. Emerging markets are near a record underweight.
Among sectors, exposure to industrials fell to the lowest level since mid-2012 and mid-2011. From a contrarian perspective, the sector may be set up to outperform.
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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).
Let's review the highlights from the past month.
Fund managers cash levels jumped to 5.4%, the third highest level since 2009. Cash has been over 5% six of the past seven months, the first time it has been this high for this long since late-2008 and early-2009. Current levels are an extreme that is normally very bullish for equities. Similar periods were market lows in mid-2010, mid-2011 and mid-2015.
Fund managers are +21% overweight equities, a huge drop from +42% overweight last month (which was near a 7-month high). Equity allocations since 2009 have only been lower in mid-2010, mid-2011, mid-2012 and mid-2015; all of these periods were notable lows for equity prices during this bull market.
US exposure remains near an 8 year low (-15% underweight; it was -19% underweight in December, an 8 year low). Despite low exposure, US equities have outperformed the past 9 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 fell slightly but remains near the highest levels in 8 years (and 1.3 standard deviations above the long term mean). Judging from 2006, European equities are at risk of continuing to underperform.
Allocations to Japan dropped to +31% overweight, which is still 1.0 standard deviations above the long term mean. In the 10 months prior to September, allocations were the highest since April 2006. The region has been outperforming since early 2014.
Emerging markets exposure fell to the second lowest in the survey's history (-33% underweight). Fund managers have been right to underweight this region, but note that recent 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 are -47% underweight bonds, a big rise from -64% underweight in December, a 2-year low. Bonds continue to be the most underweighted asset class and this, in large part, explains why cash balances have not been lower than 4.5% in two years. Note that bonds have outperformed in the past 9 months.
The drop in equity allocations and the outperformance of bonds come as fund managers have become less optimistic about the global economy. Only 8% expect a stronger economy in the next 12 months, the lowest since mid-2012.
Allocations to commodities fell to one of the lowest levels in the survey's history (-30% underweight). This is 1.7 standard deviations below the long term mean. The low allocation to commodities goes together with pessimism towards the global economy and emerging markets and also explains why cash balances are high.
Managers remain overweight the highest beta equities (discretionary, banks, tech). The largest underweights are in commodities (including energy and materials).
Fund managers' allocation to banks was among the largest ever in December; they're still overweight, but allocations are now at a 9 month low. Banks have pretty consistently underperformed the past 3 years.
Fund managers' allocation to industrials fell to the lowest level since mid-2012 and mid-2011 (1.2 standard deviations below the mean). From a contrarian perspective, the sector may be set up to outperform.
Survey details are below.
- Cash (5.4%): Cash balances increased to 5.4% from 5.2%. 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 (+21%): A net +21% are overweight global equities, a sharp drop from +42% in December and comparable to the 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 (-15%): Exposure to the US rose to -15% from -19% underweight, which was an 8 year low.
- Europe (+51%): Exposure to Europe fell slightly to +51% overweight from +55% overweight in December.
- Japan (+37%): Exposure to Japan fell to +31% overweight from +37% in December. Funds were -20% underweight in December 2012 when the Japanese rally began.
- EM (-33%): Exposure to EM fell to -33% underweight from -27% underweight in December. It was -34% underweight in September, the lowest in the survey's history.
- Bonds (-47%): A net -47% are underweight bonds, a rise from -64% in December. For comparison, they were -38% underweight in May 2013 before the large fall in bond prices.
- Commodities (-30%): A net -30% are underweight commodities, a small drop from -29% last month. Low commodity exposure goes in hand with low sentiment towards EM.
- Macro: Only 8% expect a stronger global economy over the next 12 months, a big drop from 29% last month.
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