Unexpected volatility saw fund managers move to higher cash positions, but not to the extent it signalled a buying opportunity, according to the latest edition of the Bank of America Merrill Lynch (BofA ML) fund manager survey.
Managers had moved to their highest equity positions for two years at the start of 2018. However, recent bouts of volatility made them more cautious in February.
The survey, which gathered the views of 163 participants who collectively manage $510bn of clients’ money, took place between 2 and 8 February. The S&P 500 index lost 6.56 per cent during this time.
Performance of S&P 500 vs VIX over 2-8 February 2018
Source: FE Analytics
Volatility spiked due to mounting fears that higher-than-anticipated inflation could signal a faster rate-hiking environment.
As such, investors cited inflation and/or a crash in global bond markets as the top tail risk for the second successive month.
There was also a record one-month jump in the net percentage of investors who said they had taken out protection against a sharp fall in equity markets over the next three months.
Fund managers were more bullish in January and the percentage taking out protection fell to the lowest levels seen since 2013.
There was also a notable drop in risk sentiment in the second month of the year, as the survey’s composite indicator of risk and liquidity fell to a six-month low from recent highs.
The impact of a more aggressive rate-hiking environment could be seen in fund managers’ expectations of stronger global growth, which fell by 10 per cent in February. Just 37 per cent now expect faster growth over the next 12 months.
The survey also revealed that 70 per cent of fund managers consider equity markets to be in the late cycle phase, the highest level since January 2008.
Cash balances moved back into a contrarian buy signal, rising from 4.4 per cent in January to 4.7 per cent at the start of February. The latest survey revealed that cash allocations moved to their highest level since November, at 38 per cent overweight.
However, despite the rise in cash holdings, the survey’s Bull & Bear indicator remained in sell territory.
Meanwhile, equity allocations also fell from a two-year high in January of a net overweight position of 55 per cent to 43 per cent in February, the largest monthly fall since February 2016.
“While this month’s survey shows that investors are holding on to more cash and allocating less to equities, neither trait moves the needle enough to give the all-clear to buy the dip,” said Michael Hartnett, chief investment strategist at BofA ML.
Source: BofA ML Fund Manager survey
As well as increasing cash holdings to help reduce risk and cyclicality in portfolios, fund managers have begun to reconsider their sectoral weightings to help protect them against any potential downturn in markets.
In February, managers moved into consumer discretionary, healthcare and telecommunications stocks, while selling out of commodities, real estate investment trusts and industrials.
Investors remained bearish on fixed income, as allocations moved to a record low exposure, with 69 per cent of respondents underweight, although the percentage of managers who believe bond markets were overvalued fell to 76 per cent.
Additionally, allocations to real estate fell to the lowest levels seen since May 2012 with 8 per cent of managers now underweight the sector.
On a regional level there was a small decrease in the percentage of managers who were underweight US equities.
Allocations to eurozone equities slipped to a one-year low, although 41 per cent of those surveyed were overweight European equities.
“European equity allocation is at its lowest in almost a year,” said Manish Kabra, BofA ML’s head of European quantitative equity strategy.
“Despite improving confidence in European earnings, the US and emerging market profit cycles seem more favourable to investors right now.”
The allocation to emerging markets remained flat month-on-month, while the percentage of those who were overweight Japanese equities dipped slightly but remained close to November’s all-time high.
“The Japanese market exhibited sensitivity to global risk sentiment in the recent market sell-off,” said Shusuke Yamada, BofA ML’s chief Japan FX/equity strategist.
“It seems stabilisation of the global equity market and a weaker Japanese yen may be needed for global interest to return.”
Source: BofA ML Fund Manager survey
However, the bank noted that pessimism towards the UK was entrenched among managers and it remains the consensus short position.
There were also signs that the fascination with so-called BAT (Baidu, Alibaba, Tencent) and FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks may be coming to an end, as managers noted it was the most crowded trade in the market.
Allocations to global technology stocks fell to a 34 per cent overweight in February from 37 per cent a month earlier, although they remain well above the three-year low of 24 per cent in December.
Elsewhere, managers’ exposure to utilities and global staples both slipped further into underweight territory to one-year lows in February. As previously mentioned, telecom allocations improved slightly but remained an underweight for investors, while allocations to banks remained flat.
At a corporate level, a quarter of fund managers said balance sheets are over-leveraged with the proportion of fund managers who would like to see companies return more cash to shareholders close to 2009 lows.