How have fund managers responded to an increasingly tough environment for equities?
In one respect, they are still bullish: global equity allocations are still 31% overweight. Into the major lows in 2011, 2012 and 2016, fund managers were underweight. Allocations could easily fall much further before global equities reach a bottom.
But in most other respects, fund managers are already very bearish:
They are overweight cash (by nearly one standard deviation), which is typically a tailwind for equities.
They view the US dollar as the most overvalued in 12 years, which has a very good track record of marking a turn to dollar weakness, a tailwind for US multi-nationals as well as ex-US equities.
Their profit expectations are the most bearish in 6 years, and at a level which also marked equity lows in 2010, 2011, 2012 and 2016.
Their global macro growth expectations are the most pessimistic in 10 years, more than at the major equity bottoms in 2011 and 2016.
A third believe the world's largest equity benchmark, the S&P 500, has already peaked. This number holding this view has doubled in just one month.
They believe 'value' will outperform 'growth' stocks; similar peaks (in 2009, 2014, 2016 and 2017) marked excellent times to be long equities, especially growth stocks.
The US is the most favored region in the world. That's not surprising: during a global equity sell off, the US is usually regarded as the safest haven. It should underperform. Europe is the most hated region and is likely to outperform.
* * *
Among the various ways of measuring investor sentiment, the Bank of America Merrill Lynch (BAML) survey of global fund managers is one of the best as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b in assets.
Our sincere gratitude to BAML for the use of this data.
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.
Overall: Relative to history, fund managers are overweight cash and neutral equities. Enlarge any image by clicking on it.
Within equities, the US is overweight while Europe, in particular, is underweight. This is a significant change from the past year.
A pure contrarian would overweight European equities relative to the US and underweight cash.