Wednesday, July 19, 2017

July Monthly Fund Manager Survey

The monthly fund manager survey (FMS) from BAML is out and always contains an interesting view on the global investing landscape.  This month's survey doesn't deviate much from last month's.  Fund managers continue to worry about the same set of issues while their positioning continues to be overweight the same areas.  Cash levels remain too elevated to set conditions for a market top yet growth expectations continue to trend lower.  Below are the key takeaways straight from the July survey.

  • Bottom line1. cash levels still too high for "big top"; 2. too many see Fed as likely negative catalyst while inflection lower in growth/EPS estimates being ignored; 3. energy>banks, US>Eurozone, commodities>cash (Exhibit 1best contrarian trades
  • July FMS cash levels dip from 5.0% to 4.9%; but cash remains well-above 10-year average of 4.5% & allocators very OW the asset class(Exhibit 1)…cash too high for "big top"
  • 3 most crowded trades: long Nasdaq (38%), long US/EU credit (15%), long Eurozone equities (12%)…means ECB most likely central bank to spark global "risk-off"
  • 3 biggest tail risks: crash in bond markets (28%), Fed/ECB policy mistake (27%), China credit tightening (15%)…central banks seen amuchbigger risk (the "red herring") than EPS, and yet…
  • …clear inflection point lower in FMS growth/EPS expectations; 38% expect stronger growth vs. 62% in Jan41% expect stronger profits vs. 58in Jan
  • July rotations: investors bought Japan, healthcare, materials, commodities; investors sold tech (68% say US/global internet stocks "expensive"), UK, discretionary, industrials
  • July positions: big longs in banks (knocks off tech as #1 global sector OW), Eurozone, EM; big shorts in UK, energy & US stocks (last time UW in US stocks larger was Jan'08)
Banks have overtaken tech as the most overweight global sector as 68% say US/global internet stocks are "expensive", 12% say "bubble-like", and 15% say "fair".  With the Fed on a hiking cycle and the potential for global tightening underway we understand the overweight towards banks.   However, for the third straight month "Long Nasdaq" remains the most crowded trade.

Meanwhile, sentiment remains in check as cash levels are elevated and the biggest reason for holding extra cash is "Bearish views of the markets".  This bearish stance coincides with expectations for "faster global growth" falling to 38% in July, down from 62% in January.  Fund managers continue to lose faith in profit and earnings expectations as they sink to the lowest percentage since the US election.  Additionally, 17% say corporate balance sheets are over-leveraged, the most since April 2009. 

 Exhibit 2 Evolution of Global FMS "most overweight global sector"5229154ce8d74d64af24807447bef23f.svg
  Exhibit 3 Evolution of Global FMS "most crowded trade"

Exhibit 6: If you are holding consistently higher levels of cash in recent quarters, does this reflect:
 Exhibit 8How do you think the global real economy will develop over the next 12 months?2eb5703955674dfe916529b3e9939829.svg

With the news that Republicans could not pull together enough support in the Senate to pass a health care overhaul this will only put more pressure on growth expectations.  Much of those assumptions had been built on the idea that growth will come with less regulations and lower taxes.  This theme could be pushed out further into the future with the failure to pass an Obamacare replacement.  Sentiment could take a hit as traders fear tax reform will not take place this year. 

The S&P 500 has now tied the second longest streak in history without a 5% pullback having gone 173 days without such a drop.  The index first notched this marker in 2006-2007.  The only longer streak was the massive 296-day span during the roaring bull market of the 90's from 1995-1996.

In a previous blog post we commented:

"Below we looked at all instances since 1990 where the NDX closed down more than 2% after having just made a new 52-week high on the prior trading day.  From the data, the very short-term (5 days) is neutral but going out further there is a bias to the upside.  It shouldn't surprise anyone if we make new highs sooner than expected.  The one caveat in the data below is many of the data points happened during the super bull of the late 90's.  If we included the crash of 87 the results are worse but it was such an outlier we chose to ignore.  Regardless we thought it was interesting enough to present." 

Since then all markets have made new highs or tested highs.  The trends remain favorable to the bulls as all moving averages are pointing strongly higher.  We still favor the trend and positioned bullishly but also acknowledge there will/should be pullbacks along the way.  With seasonality setting up for a potential increase in volatility along with the excessive length without a 5% pullback, we are comfortable being patient with some cash on the sidelines looking for better entries as we navigate earnings season.