Summary: At the panic low in equities in February, fund managers' cash was at the highest level since 2001, higher than at any time during the 2008-09 bear market. Since 2009, allocations had only been lower in mid-2011 and mid-2012, periods which were notable lows for equity prices during this bull market.
Since then, equities around the world have risen an average of 16%. Despite this, both cash and equity allocations are basically unchanged since February. This supports higher equity prices in the month(s) ahead.
Allocations to US equities fell to back to their 8-year low in May, a level from which the US should continue to outperform, as it has during the past year. Europe remains overweight. Emerging market allocations have jumped significantly in the past four months and are now overweight for the first time since September 2014, a high from which emerging market indices fell over the next half year.
The dollar is no longer considered overvalued. In the past three months, the dollar index has fallen 6%.
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 this December 2014 (post).
Let's review the highlights from the past month.
Cash: Fund managers cash levels at the equity low in February were 5.6%, the highest since the post-9/11 panic in November 2001, and lower than at any time during the 2008-09 bear market. This was an extreme that has normally been very bullish for equities. Remarkably, with the SPX now 15% higher, cash in May (5.5%) is still near the highs. Even November 2001, which wasn't a bear market low, saw equities rise nearly 10% in the following 2 months. This is supportive of further gains in equities.
Global equities: Fund managers were just +5% overweight equities at their low in February; since 2009, allocations had only been lower in mid-2011 and mid-2012, periods which were notable lows for equity prices during this bull market. Despite the rally since February, allocations are basically unchanged in May (+6% overweight). This is 0.9 standard deviations below the mean.
US equities: US exposure is near an 8 year low (-18% underweight; it was -19% underweight in February). Despite low exposure, US equities have outperformed the past year. US equities have been under-owned and should continue to outperform those in Europe on a relative basis (see below).
European equities: Eurozone exposure continues to fall (+26% overweight). Exposure is now less extreme (0.4 standard deviations above the long term mean) but relative to the US, European equities are at risk of continued underperformance.
Japanese equities: Allocations to Japan dropped further to -6% underweight, which is the lowest since December 2012. The region has been underperforming in 2016.
Emerging markets equities: In January, allocations to emerging markets fell to the second lowest in the survey's history (-33% underweight), an extreme comparable only to early-2014 from which the region began to strongly outperform for the next half a year. Allocations have since risen to +2% overweight, the highest since September 2014, which is still 0.7 standard deviations below the long term mean. The region has outperformed the rest of the world so far 2016. Allocations are now where the rally in mid-2014 failed.
Global bonds: Fund managers are -41% underweight bonds, a big rise from -64% underweight in December, which was a 2-year low. Bonds outperformed in the 10 months before the current equity rally began in February. Note that bonds have historically started to underperform when allocations rise to -20% underweight (red shading). Current allocations are back to their long term mean.
In February, 16% expected a weaker economy in the next 12 months, the lowest since December 2011. Investors are still pessimistic, with only 15% expecting a stronger economy in the next year. This explains the low allocations to equities and high allocations to cash.
Commodities: Allocations to commodities in February were near one of the lowest levels in the survey's history (-29% underweight). A low allocation to commodities goes together with pessimism towards the global economy and emerging markets. Allocations are still 1.0 standard deviations below the long term mean at -19% underweight.
Sectors: Relative to history, managers are overweight cash. They are more overweight bonds than equities. Overall, this is very defensive positioning.
Similarly, fund managers think 'growth' stocks will underperform 'value' stocks over the next year. This reflects a pessimistic view on earnings, the economy and therefore higher beta stocks. This was also the case, for example, in early 2009.
Fund managers 'risk appetite' (a function of their equity sector allocation, cash levels and time horizon) is 1.2 standard deviations below the mean, nearly matching the low levels from February.
Dollar: Since 2006, fund managers surveyed by BAML have been very good at determining when the dollar is overvalued. In March 2015, they viewed it as overvalued for the first time since 2009; the dollar index fell from 100 to 93 in the next two months. In February 2016, they again viewed the dollar as overvalued and the index subsequently lost 6%. Similar cases are highlighted in green. 12% of fund managers now believe the dollar as undervalued, the highest since July 2015, after which it rallied.
Survey details are below.
- Cash (5.4%): Cash balances increased to 5.5% from 5.4%; February (5.6%) was the highest since November 2001. 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 (+6%): A net +6% are overweight global equities, down from +9% in April and not much changed from +5% in February. Over +50% is bearish. A washout low (bullish) is under +15%. More on this indicator here.
- Regions:
- US (-18%): Exposure to the US fell to -18% underweight from -10% in April; it's not much different than the -19% underweight in February, which was an 8 year low.
- Europe (+26%): Exposure to Europe fell to +26% overweight from +33% overweight in April.
- Japan (-6%): Exposure to Japan fell to -6% underweight from +15% overweight in March. Funds were -20% underweight in December 2012 when the Japanese rally began.
- EM (+2%): Exposure to EM rose to +2% overweight from -33% underweight in January and -8% underweight in April. -34% underweight in September 2015 was the lowest in the survey's history.
- Bonds (-41%): A net -41% are underweight bonds, a rise from -64% in December but down slightly from -38% in April. Note that global bonds started to underperform in mid-2010, 2011 and 2012 when they reached -20% underweight.
- Commodities (-19%): A net -19% are underweight commodities, an improvement from -22% last month. Low commodity exposure goes in hand with low sentiment towards EM.
- Macro: 15% expect a stronger global economy over the next 12 months; in February, 16% expected a weaker economy, the most pessimistic since December 2011.