- Cash Holdings Close to Credit Crisis Highs in Wake of Equities Sell-Off
Investors believe that the global economy will slow significantly in the coming 12 months but will avoid dipping back into recession, according to the BofA Merrill Lynch Survey of Fund Managers for August.
A net 13 percent of respondents to the global survey believe that the world economy is headed for a period of weaker growth. The reading represents a significant swing since July when a net 19 percent were confident the economy would improve. Investors’ forecast for corporate profits shows the biggest downwards swing in the survey’s history. A net 30 percent of the panel expects the profit outlook to deteriorate in the coming 12 months. In July, a net 11 percent forecast an improvement in profits.
However, a net 42 percent of investors still hold the view that a global recession is unlikely in the coming year. The survey took place from August 5 to August 11, when world equities fell by 12.3 percent.
Cash holdings have soared to their highest levels since the depths of the credit crisis as investors have moved out of equities, notably cyclical stocks. Cash balances have climbed close to their high of 5.5 percent in December 2008. Global investors hold an average of 5.2 percent of portfolios in cash, up from 4.1 percent in July. A net 30 percent are overweight cash compared with their benchmark. Both numbers are at their highest level since March 2009.
Asset allocators have scaled back equity positions faster than in any previous month in the survey’s history. A net 2 percent remain overweight equities, down from a net 35 percent in July. Asset allocators have also reduced their underweight positions in bonds and reduced holdings in commodities and alternative investments.
“Flows out of equities into cash have reached capitulation levels, especially in the U.S., but it’s significant that a revival in optimism towards China has survived the global correction,” said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research. “Investors are waiting for convincing, coordinated action from governments before recommitting their cash to equities,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.
U.S. sentiment down sharply
Asset allocators have reduced their positions in the U.S. more aggressively than in any other region and at the sharpest rate the survey has ever recorded. Asset allocators responding to the global survey moved slightly underweight U.S. equities. A net 1 percent of the panel is underweight this month, compared with a net 23 percent overweight in July.
At the same time, U.S. fund managers have demonstrated a U-turn in economic sentiment. A net 14 percent of the U.S. panel believes their economy will weaken, in contrast to the net 29 percent predicting a stronger economy in June.
The eurozone is the one region to have avoided the global equities sell-off. The panel remains underweight eurozone equities, but the net percentage underweight the region has fallen to 15 percent in August, from 21 percent in July. Within Europe, however, the story has darkened. A net 71 percent of the regional panel expects the European economy to weaken, up starkly from a net 22 percent in July; although, a strong majority rejects the idea that Europe will go into recession.
More positive towards China
Asset allocators have reduced their overweight position in global emerging market (GEM) equities. A net 27 percent of the global panel is overweight the region, a fall of 8 percentage points month on month. GEM fund managers are slightly less optimistic than a month ago, but the shift in sentiment is far less pronounced than their colleagues in the U.S. and Europe.
That could reflect a view from GEM fund managers and their counterparts in Japan and Asia-Pacific that China’s outlook is brighter. A net 11 percent of fund managers from these regions believe that China’s economy will weaken, but that is down from a net 24 percent in July and a net 40 percent in June.
Big sale of cyclicals; gold overvalued (once more)
Global asset allocators have departed cyclical stocks en masse over the past month. Allocations towards industrials suffered a negative 27 percentage point change from July to August. A net 16 percent of global allocators are underweight Industrials, compared with a net 11 percent overweight in July. The proportion of respondents overweight energy stocks declined to a net 14 percent from a net 27 percent a month ago. While a large majority of allocators remain underweight banks, the month-on-month swing in the sector was a modest 4 percentage points.
The move out of cyclical stocks reflects how three-quarters of investors this month identified business cycle risk as the number one risk to market stability – up from 42 percent in July.
Investors have taken the view once more that gold is overvalued. In July, the net percentage taking this view dipped to a net 17 percent. But with gold hitting new highs, a net 43 percent of August’s panel believe it is overvalued.
