Every month on the The Fat Pitch website (link), we review the latest BAML survey of global fund managers. Among the various ways of measuring investor sentiment, this is one of the better ones as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $700b in assets.
An extreme in bullish equity sentiment was reached in July, with fund manager equity weightings at +61% overweight, the second highest since the survey began in 2001. This was a clearly identified risk to near term equity performance (post). Since then, the Euro 350 has dropped 8% and SPX has dropped 5%.
In response, equity allocations have fallen to +44% overweight in August. There’s good news and bad news in this.
The bad news first. Is this a washout? No. 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 18 months, a washout low would be marked by an equity weighting under +20% (green circles). By that measure, equities are highly over owned.
Now the good news. The current bull market is nothing if not persistent. Equities have not been less than +36% overweight since early 2013. If this is buy support again, then weakness in August will likely mark a low in the next month like those in February and April.
The other factor in equity bulls favor is that cash levels rose above 5% in August. The number instances is low but cash above 5% has been close to lows in 2002, 2003 and 2012. It was a bit early in 2011 and very early in 2008-09. But overall, this is a positive and would likely be more so with further equity weakness in August.
In the world’s largest equity market, the US, equity allocations dropped to +6 overweight from +10% in July. Given how strongly the US has outperformed the rest of the world in the past several years, exposure is surprisingly low. It is not over-owned until weightings are +20%. Again, further weakness in August would like put allocations in the strong buy zone.
Bonds continue to be the most hated asset class. It’s worth recalling that in June, 88% of fund managers said they believe US 10-year bond yields will be over 2.5% by year end. Yields were 2.37% last week, the lowest since June 2013.
Now in August, 78% of managers said they expect short rates to increase in the coming months, the highest since May 2011. This is not a positive for rates: 5 year rates dropped from 2% in May 2011 to 0.5% in the following year. Managers were also wrong when sentiment was this high in 2002, 2004 and 2010.
You can see from the data that it should mostly be looked at from a contrarian perspective. Fund managers were underweight EEM more than any other market at the start of 2013, and it was the worst performer in the following year. In comparison, they were 20% underweight Japan in December 2012 and it was the best equity market in 2013. Now, the underweights are the US, defensive sectors and bonds.
You can read more details about the current survey here.
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