September Fund Manager Survey

The monthly fund manager survey (FMS) from BAML is out and always offers an interesting view on the global investing landscape.  This month's survey provides some new data points but doesn't deviate much from that last few months.  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 and US equity underweight is at a 10-year high.  Below are the key takeaways straight from the August survey.

• 3 talking points: 1. FMS says markets can remain in "Icarus" upside mode for risk assets, 2. "mean reversion" has become contrarian as investorscut expectation of higher bond yields; 3. US equity UW at 10-year high, EM OW at 7-year high as US$ bulls vanish
• On Icarus: Sept FMS shows cash levels high (down from 4.9% to 4.8% but >4.5% ave past decade), largest jump in "taking out protection" in 14 months, lowest OW in equities since Dec'16 & smallest UW in bonds since Nov'16…no irrational exuberance yet
• On mean reversion: rotation back to QE themes of scarce "growth" (e.g. tech - Exhibit 1) & "yield" (e.g. EM), away from "value" (Japan, banks) asinvestors shun mean reversion, slash expectations for "much higher" bond yields (+26% last Nov to 5%); energy ("value") UW largest since Mar'16, utilities ("yield") UW smallest since Aug'16
• On macro: FMS growth optimism continues to sag (+62% in Jan to +25% today) but profit hopes rose a tad this month (+34%)…greater conviction in EPS than GDP; notable divergence in FMS perceptions of fiscal policy ("easy") vs. flatter yield curve (see Exhibit 10) shows US tax reform most obvious catalyst for steeper US curve
• Most crowded trades: 1. long Bitcoin (up $1000 to almost $5000 early Sept), 2. long Nasdaq (up 20% YTD), 3. short US$ (-11% YTD); note longUS$ was most crowded trade as recently as Mar'17 - Exhibit 2)
• On risk: biggest tail risk is North Korea by some margin (tallies with Sept drop in Japan equity exposure), followed by Fed/ECB policy mistake; recession in next 6 months deemed biggest potential surprise, an equity bubble least surprising
• On regions: biggest UW in US stocks since Nov'07, biggest OW in EM stocks since Dec '10; investors have not been this UW the US relative to EM/Eurozone since 2007; weak US$ big factor (US$ now most "undervalued" since Dec'14)
• Contrarians would be: long US$, long US energy, short EM tech, long Japan banks, short Eurozone discretionary/banks

One of the biggest changes this month has to do with evolution of tail risk and the fear of a conflict with North Korea.  This has become the top rail risk in September by a wide margin.  This coincides with fund managers belief that volatility is the most undervalued asset which dwarfs the next asset by far.  Cash remains elevated and this makes sense with fund managers heightened sense of angst combined with expectations for faster global growth falling again in September as it sits at the lowest level since October 2016.  Meanwhile fund managers continue to increase their hedges as equity markets hit new highs.  Hedges had their largest jump in 14 months.  Bitcoin makes its first appearance as this tops the list of most crowded trades.  Lastly, allocation to US equities falls to net 28% underweight from net 22% underweight last month.  The last time the underweight in US was larger was in November 2007.  

  
In summary, fund managers have been selling US equities into strength while increasing their hedges.  After a healthy run in equity markets managers are positioning their exposure in cheaper global markets yet continue to favor growth sectors over defensive ones.  With the historically weak August and September about to wrap up we are entering the seasonally strong 4th quarter.  In the short term we have internal market indicators flashing overbought conditions as US equities have hit new highs.  As we discussed in our last blog september stats to consider, we showed how the back half of September is usually weaker.  We will be watching how the markets react to the FOMC announcement today along with any fresh data out of the Fed.  In turn, tactically we have used the strength to lighten up some positions but we maintain that any weakness should be bought as we continue to believe this market will finish the year strong.  We'll leave you with one stat that is extremely impressive from Ryan Detrick.

"Since '28, S&P 500 higher each month May - Sept ... 4Q has never been lower. Up 6 for 6 with an avg return of 9.6%. Could happen this year."