While the mother BofA fights the legacy, the monthly Global Fund Manager Survey by Merrill Lynch is out of the gates of research factories today. The key take-aways this month:
Liquidity prospects taking risk appetite for a ride
The October FMS sees a resurgence in risk appetite compared to the caution of the last 3 months as the prospect of a further dose of QE in the US is forcing portfolio adjustments. And yet, with only a small uptick in growth expectations consensus is betting on short term relief rather than a long term cure. Equities as an asset class have benefited from this sentiment shift but the focus is a very narrow one on Emerging Markets (and commodities).
Risk appetite: major upgrade
The risk being taken in investor portfolios saw the biggest jump since April ‘09 Our Risk & Liquidity indicator surged to 43 from 37. Cash balances fell to 3.8%, not extreme. Hedge funds raised gearing levels to 1.44, the highest since March ‘08. A net 45% of investors see USD as undervalued, but only net 12% think it will appreciate over the next 12 mths (down from 38% in Sept).
Economic growth: minor upgrade
Investors are reserving judgement on the likely real economic effects of QE. A net 15% now expect higher growth (0% last month) with the threat of a double dip largely dismissed (by net 82%). But only 9% expect above trend growth in the coming 12mths. Inflation expectations moved sharply higher (a net 27%, up from 9%) and with negative $ views commodities benefited. But the narrow focus is highlighted with only a net 11% expect stronger corporate profits (vs. 2% in Sept).
Emerging Markets or emerging market growth
A net 71% of investors see bonds as overvalued, the highest level since Sept ’05. Allocators raised weightings in equities (+27% from 10%) and commodities (+17% from 4%). Bonds fell to a net 24% u/w and cash to 6% o/w (vs. 18%). By region, a net 49% are O/W EM, the highest since Nov ’09; at +3% EU is the only other O/W. Despite valuation concerns, EM is the only region investors want to o/w in the coming 12 mths. Sector moves were EM-related with energy, industrials & materials benefiting over utilities and financials. At +1% consumer discretionary saw its first ever positive reading. Low growth world = tech the favoured sector.
For the contrarian:Click on chart to enlarge, courtesy of BofA Merrill Lynch.
long USD, banks, utilities, Japan; short EM, tech, commods
An extreme preference for EM over Japan triggers a contrarian trading rule this month; the last time we got close on this Japan outperformed EM by 9% in the following 3 mths. Other contrarian trades are long USD, banks and utilities; short EM FX, tech and commodities.