Cash levels increased in April but fund managers remain bullish about the prospects for markets, according to the latest Bank of America Merrill Lynch (BofA ML) Global Fund Manager Survey.
The closely-watched survey found that cash levels of asset allocators around the world increased from 4.6 per cent to 5 per cent month on month and remain high relative to the survey’s history.
Just 5 per cent of respondents believe there will be faster global growth during the next 12 months, down by 13 per cent on March and falling to the lowest level since the UK’s EU referendum.
Source: BofA ML Global Fund Manager Survey
Additionally, fund managers remain concerned about corporate indebtedness with 41 per cent believing companies to be overlevered, higher than a 32 per cent peak recorded during the global financial crisis in 2008.
A decline of capex-deleveraging spread (or the percentage of investors saying companies should improve capex minus the percentage saying companies should improve balance sheets) to 10 per cent has historically implied a greater chance to bonds outperforming equities. The spread currently stands at 15 per cent.
Bonds remain an underweight position for global managers at 55 per cent despite climbing by 9 percentage points in April. Allocations to equities dropped to 29 per cent from a 41 per cent overweight in March, in line with the long-term average.
The bank further noted that despite more bearish positioning managers still remain bullish about the prospects for global markets.
Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, said: “The bulls have been silenced but not defeated, evidenced by increased cash allocations and low expectations of global growth and profits.
“But true bull capitulation is absent, with most investors saying the peak in the stock market is still to come.”
Indeed, just 18 per cent say the equity markets have peaked, with 40 per cent expecting them to peak during the second half of the year and a further 39 per not cent expecting the peak to occur until 2019.
Despite the increase in cash levels, as shown in the above chart, the bank’s ‘Cash Rule’ – which signals a contrarian buy signal when average levels move above 4.5 per cent or contrarian sell signal when they move below 3.5 per cent – remains in ‘buy’ territory.
For the second consecutive month the biggest tail risk to markets – the additional risk that an investment will move more than three standard deviations from current levels – is a global trade war, with 38 per cent of fund managers.
Concerns over a potential trade war increased month-on-month as US president Donald Trump planned to impose a number of tariffs on China, which retaliated by announcing its own tariffs on US goods, sparking fears of escalation.
Source: BofA ML Fund Manager Survey
Other tail risks included a hawkish policy mistake by the Federal Reserve and/or European Central Bank, while illiquidity caused by market structure ranked third.
Also on the list of potential tail risks was a crash in tech stocks. The sector has come under increased scrutiny following well-publicised allegations surrounding Facebook and use of personal data and saw founder Mark Zuckerberg appear before the US Congress last month.
The latest edition of the survey highlighted “aggressive ‘Occupy Silicon Valley’ policies” such as anti-trust, tax or data would prompt fund managers to move away from overweight technology positions.
The sector remains one of the most overweighted by fund managers and ‘long FAANG+BAT’ – Facebook, Amazon, Apple, Netflix & Google + Baidu, Alibaba & Tencent – was deemed the most crowded trade by managers.
However, the overweight position to tech did fall by 14 percentage points in April to a 20 per cent overweight, the lowest level since February 2013.
Allocations to banks also dropped during April, falling to a 26 per cent overweight in portfolios, while allocations to defensive sectors such as healthcare and utilities moved higher.
On a regional basis, allocation to US equities remained underweight falling by 1 per cent month-on-month to a 10 per cent underweight, while Japanese overweight fell by 9 per cent to 15 per cent overweight.
Allocations to emerging market equities returned to a seven-month high of 43 per cent overweight and was the consensus long equity position, according to the bank.
Eurozone equities dropped to a 13-month low in April to a 34 per cent overweight, although it remains the second most overweighted region after emerging markets.
There was surprise good news for UK equities as investors rotated into the most unloved area of global markets.
The bank noted that pessimism towards the UK had tempered during April, with a net 33 per cent under to the country. This is an improvement of 8 percentage points from record lows in March and signalled the biggest one-month increase since before the EU referendum in June 2016.
Source: BofA ML Fund Manager Survey
Yet, UK equities remains the most unloved market and by far the largest short position among respondents to the survey relative to history, described by the bank as an “extremely contrarian trade”.
In Europe, Germany remains the most popular market among fund managers, followed by Spain as positive sentiment towards France dropped off over the past month.
The latest survey polled 176 participants with assets under management of $543bn between 6 and 12 April.