August 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 doesn't deviate much from prior recent 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 yet growth expectations continue to trend lower.  Below are the key takeaways straight from the August survey.

• Bottom line: FMS cash levels high, fail to trigger risk “sell” signal from BofAML’s Bull & Bear indicator; record highs in investors forecasting “Goldilocks” and saying stocks“overvalued”; negative inflection point in FMS profit expectations our key takeaway.

• Aug cash unchanged at stubbornly high 4.9%; asset allocation to cash rises to 9-month
  high; but cash & overvaluation fears aside, FMS positioning remains broadly pro-risk,
  pro-cyclical (i.e., long Eurozone, EM, banks, equities, short US/UK, energy, bonds).

•  Ominous inflection point in profit expectations indicator (was 58% in Jan, now 33%); FMS profit outlook correlates with PMIs, equities vs bonds, HY vs IG bonds, cyclical vs
  defensive sectors (Exhibit 1); further deterioration likely to cause risk-off trades.
   
• Note recession (53%) would be biggest surprise for FMS investors in next 6 months,
  then “inflation” (25%); least surprising would be “equity bubble” (34%); biggest “tail risk”
  deemed to be Fed/ECB policy mistake, then bond crash & North Korea.
   
• Anglo-Saxon political angst reflected in lowest allocation to US stocks since Jan’08, to
  UK stocks since Nov’08; in contrast EM & Eurozone remain consensus longs (note China
  3-year GDP estimates up to 5.8%, highest since Apr’16).
   
• Top sector overweight is banks (record high), followed by tech (though contrarians note
  tech allocation fell to 3-year low); energy allocation drops to 14-month low; allocation to
  staples/telecom/utilities (“defensives”) still low, but starting to pick up.
   
• Contrarian trades: long utilities vs. banks, long energy vs. industrials, long materials vs.
  tech, long UK vs the Eurozone. 

What continues to be a trend is that fund managers maintain a fair amount of cash while favoring high quality and value over growth.  They continue to view the US markets as overvalued and allocations to US equities fell to a net 22% underweight.  The last time they were so underweight US stocks was in Jan 2008.  Meanwhile, allocations to Eurozone equities rose to net 56% overweight and EM equity allocation rose to net 39% overweight.  Relative US equity positioning versus the rest of the world sits at -60% which is the lowest since April 2007 and 1.3 std dev below its long-term average.   In an interesting twist, allocation to global technology falls to net 24% overweight which is a 3-year low while bank allocations hit a record high.

The S&P has currently pulled back 2.1% from its recent highs.  One would think the strength in the trend this year would have sentiment peaking and hitting extremes.  Yet after every little 1-2% down move we get the opposite in which the fear indexes spike and sentiment flips bearish.  This leads us to believe that most participants still don't fully believe in this bull market and are ready to sell fast at the first sight of weakness.  Fund managers continued high level of cash confirms this and a look at the CNN fear and greed index shows current sentiment is fearful.  The recent spike in put/call ratios and vix term structure further displays the lack of conviction in the current market. 

A few things we're watching to keep us honest is the weakness in small caps along with the deteriorating breadth.  New lows in the S&P 500 (middle panel) have hit the highest levels since June 2016.  This is higher than the pre-election weakness we saw last November.  The % of stocks above their 50-day moving average (bottom panel) continues to lag.  This isn't as concerning as this measure has trended lower for over a year now but it is something we keep an eye on.  We would prefer to see new highs in the markets accompanied by a fresh breakout in breadth.  In the second chart below we see that 3 out of 4 of the big index's remains in a solid uptrend and above their corresponding moving averages.  The one weakness is in small caps as the Russell 2000 has pulled back 5.9% from the July highs, and given up its 2017 gains, while testing longer-term moving averages.

As we discussed in our last post seasonality isn't on the side of bulls the next few months.  Couple that with the current length without even a 3-5% pullback and the worsening breadth keeps us with some cash on the sidelines while maintaining core positions from a tactical standpoint.  However, what keeps us bullish overall is how quickly the market prices in fear on every little dip as there remains plenty of angst and skepticism.  Sentiment remains bearish and is a nice contrarian indicator as this remains one of the most unloved bull markets.  With allocations to US equities the most underweight since January of 2008 and tech allocations at a 3-year low, we would favor to put cash to work after any pullback takes hold.