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, and stocks have subsequently sold off each time. Contrariwise, there were some relative bearish extremes reached in August and October to set up new rallies. We did a recap of this pattern in December (post).
Summary: In April, fund managers maintained their global allocation to equities at one of the highest levels since the bull market began. It has been 1 standard deviation over the long term mean for three months in a row. Under similar circumstances in the past, long equities has had a poor risk/reward profile over the next month or so. Eurozone and Japanese equities are both 1.3 standard deviations overweight. US and emerging markets are out of favor and are contrarian longs.
Let's review the highlights.
Fund managers maintained their cash levels at 4.6%. While this is relatively high on a historical basis, note that cash levels haven't been much below 4.5% since early 2013. We consider current levels to be neutral.
Fund managers are +54% overweight equities, down slightly from +58% in March which was the third highest since the bull market began six years ago. Their equity exposure has been 1 standard deviation over the long term mean for three months in a row for the first time in the survey's history. Under similar circumstances in the past, long equities has had a poor risk/reward profile over the next month. Similar instances are highlighted in green.
As we have continually noted, what has been remarkable is how long managers have been highly overweight equities (virtually since the start of 2013). This is longer than any period during the 2003-07 bull market (yellow shading). In the past, after overexposure like that seen in the past 2 years, a washout low would be marked by an equity weighting under +15-20% (green shading).
US exposure was -12% underweight in April, a small increase from -19% underweight in March, which was the lowest since January 2008. US equities are under-owned and should outperform those in Europe and Japan (see below).
Eurozone exposure jumped massively to +60% overweight in March, the highest in the survey's history. It declined to a still substantial +46% in April. Judging from the experience in 2006, European equities are likely to underperform.
Allocations to Japan stayed near the highs of the last few months (+38% overweight). Allocations the past six months haven't been this high since April 2006. It looks extreme. Managers expect Japan to benefit from central bank liquidity.
Fund managers are -18% underweight emerging markets, a further decline from March despite the region's strong performance recently. This is where bottoms form, but, in the past, it has often (but not always) taken more than one month for a solid low to be put in.
Fund managers remain -54% underweight bonds. 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. For comparison, managers were -38% underweight in May 2013 before the large fall in bond prices.
Globally, managers are not just overweight equity and underweight bonds, they are overweight the highest beta equities (technology, discretionary, banks). The largest underweight is energy.
The global overweight in discretionary stocks is the highest since the survey began. It is 3 standard deviations from the long term mean.
In the US, pharma (biotech) is one of the most favored sector. This has been the case for many months. Utilities, staples, telecoms (defensives) and energy remain underweighted.
Only 33% of fund managers think oil is overvalued. It was similar at the low in oil in 2009.
Survey details are below.
- Cash (+4.6%): Cash balances remained 4.6%. 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 (+54%): A net +54% are overweight global equities, down from +58% in March, an 8 month high. Over +50% is bearish. A washout low (bullish) would be under +15-20%. More on this indicator here.
- Bonds (-54%): A net -54% are now underweight bonds, unchanged from March. For comparison, they were -38% underweight in May 2013 before the large fall in bond prices.
- US (-12%): Exposure to the US rose to -12% underweight from -19% last month, the lowest since January 2008. For comparison, it was +24% overweight in January.
- Europe (+46%): Exposure to Europe fell to +46% overweight, from +60% overweight in March, the highest in the survey's history.
- Japan (+38%): Managers are +38% overweight Japan, down from +40% from last month. Funds were -20% underweight in December 2012 when the Japanese rally began.
- EEM (-18%): Managers further decreased their EEM exposure to -18% underweight from -11% in March. This is the lowest in the past two years.
- Commodities (-20%): Managers commodity exposure remained low at -20% underweight. With the exception of August, it has been less than -15% since early 2013. Low commodity exposure goes in hand with low sentiment towards EEM.
- Macro: 72% expect a stronger global economy over the next 12 months, an increase from 62% in March. 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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