Fear The Upside Surprises In Economic Or Corporate Data?

Bank of America Merrill Lynch published their monthly Global Fund Manager Survey today. All in all, there seems to be little changes since last report, although the markets have managed to run another round.

The September consensus: anti-growth, anti-risk
Investors remain cautious and risk averse; they are poorly positioned for any upside surprises in Q3 economic or corporate data. Growth expectations are stagnant; margin expectations are down and cash levels up.
Where is the optimism? EM equities, Chinese growth and equities as an asset class, which are now thought to be extremely cheap compared to bonds.

On growth: expectations stagnant, but China back on track
Investors are evenly split on whether the global economy will improve over the coming 12 months, with more than three-quarters anticipating a world of below trend growth and inflation. There was a notable drop in expectations for corporate margins. The good economic news is on China with a net 11% now expecting stronger growth over the next year up sharply from the pessimism of recent times.

On risk: hedge funds stirring but risk metrics down
Hedge funds raised their gearing levels to 1.39 from 1.16, the highest level since March 2008. Elsewhere however, risk measures were cautious. The BofA-ML Risk Appetite & Liquidity Index slipped back to 37; average cash balances rose marginally to 4% and a net 20% are overweight cash (highest since July 2009). Jitters on Ireland raised EU debt funding in investor ranking of principal tail risks with premature fiscal tightening and US muni default seen as the other key risks.

Bond versus equities: relative valuation at extreme
Investors view bonds as the most expensive relative to equities since we started gathering bond data in early-2003 (a net 38% view equities as undervalued; a net 68% see bonds as overvalued). Yet asset allocators reduced their bond UW, are significantly OW cash (+18%), modestly OW equities (+10%) and slightly OW commodities (+4%).

The contrarian trade: Japanese equities
Profit expectations for Japan (-39%) are the worst since April 2002. A net -32% of
investors are UW the Japanese market, the lowest reading for 9 months. 72% of investors view the Yen as overvalued (the highest ever). Japan is the biggest contrarian trade in this month’s survey. Elsewhere, EM equities remain OW while views on US and EU (both equities and currencies) drifted towards neutral.

Equity sectors: going on a yield hunt
Falling bond yields encouraged investors to embark on a yield hunt with the largest sector moves being into utilities (now only net -11% UW from -27%), telecoms (+10% OW from +4%) and pharma (+17% from +12%). Tech remains the most popular sector at +25% but is sharply down from its 6m high of +46%.

Just curious about those cash balances, as mutual funds elsewhere are "All In", or close to levels just before the 2007 market top. Well, in a mixed environment hedge funds raised gearing levels? Driven by cognitive dissonance?