Merrill Lynch(ed): Global Fund Manager Survey

Bank of America Merrill Lynch published their monthly Global Fund Manager Survey yesterday. "The picture" looked like this in August. Key conclusions from the new September survey:

Recession risk reduced
September FMS sees further gains for the bulls as investors continue to gradually embrace global economic recovery. Less than a third of investors now see the global economy in recession compared to two-thirds only 2 months ago.

Goldilocks back in town
Investors remain cautious on strength of recovery; 72% believe we are heading for below trend growth and inflation. The tail risks i.e. deflation or inflation have become much less consensus (only a net 3% believe in either scenario).

Micro story improving
There is growing belief in margin story. In two months corporate operating margin expectations have jumped from -3% to +38%. Views on corporate profits 12 months out (net +68% versus +70%) are positive but again are not yet exuberant (previous recoveries have seen sustained readings above 80%). There still appears to be residual reluctance to fully embrace a robust recovery story.

Risk appetite held in check: cash balances refreshed
Despite improvement in the macro backdrop there is reluctance to get too carried away. Risk & Liquidity indicator at 40 i.e. average reading for the past eight years. Cash balances rose to 4.1% from 3.5%. A net 18% of all investors are OW cash in portfolios, up from +10% in August.

Inflation views bond supportive
September saw inflation expectation over next 12 months drop from a net 30% last month to a net 21%, helping explain how bonds are rallying despite growing economic optimism. 70% of investors still see higher short rates 12 months out.

Allocation broadens out; GEM no longer only game in town
GEM remains strongly OW in regional allocation but fell to +40% from +52%, as Eurozone was raised to only 1% UW (from -13%), the highest reading since Feb 2008. EU is now #2 region investors want to OW on a 12 month view. Also GEM investors are now net UW on China (-9%) after 13 months of net OW.

Defensive sector capitulation but where to go long?
The big 4 defensive sectors are all now UW (as noted in June) which may prompt rotation at the expense of the two big consensus OW of tech (+31%) and energy (+27%). Outside of these, investors cut exposure to the strongly performing materials and industrial cyclical sectors leaving only modest cyclical exposure.

Contrarian long & shorts
Contrarian longs: Japan, UK & EU consumption, EU banks, utilities in almost every region, GEM materials, real estate. Contrarian shorts: US, EU, Japan, Asia tech, EU energy, EM consumer, Russia, Brazil.

Goldilocks? Not recognizing loss and pumping liquidity in hope to inflate the underlying assets do not change the structural perversity.

I prefer defensives ...