The most bullish sentiment since April
The November FMS shows market sentiment at its most bullish since April 2010. Put simply QE2 has raised both global growth & inflation expectations, reduced cash balances to dangerously low levels and caused capitulation into risk & inflation assets. The bullish consensus makes a normal year-end rally very vulnerable to a deflationary rally in the US$. Progress in the EU sovereign funding concerns and/or strong economic data that boosts bank stocks are now needed to prolong the Autumn risk rally.
Loose policy...surging growth and inflation expectations
The net percentage forecasting stronger global growth jumped from 15% to 35%, while inflation expectations surged from 27% to 48%. The perception that monetary policy is "too easy" rose to its highest level (45%) since July 2004. There was an intriguing decline in Chinese growth expectations while the biggest consensus "tail risk" is a European sovereign debt default.
Risk on: feel the quantity, not the quality
Asset allocators have drained cash reserves (a rare U/W reading of 5%) with average cash holdings falling to just 3.5%; this triggers a contrarian tactical sell signal for equities. Our risk appetite index rose to 45 (the highest since April) and with less than 1 in 5 investors believing a Fed rate hike is likely before Q4 next year, investors raised equities up to net 41% O/W from 27% in Oct and cut bonds to a net 36% U/W (from -24%).
Maximum Bullish on EM & Materials
The proportion of allocators O/W EM increased to a net 56%, close to an all time high. Despite sovereign debt concerns, rotated into Eurozone equities, and the 15% O/W is the largest since 2004. Japan remains the most unloved equity region. In sectors, Tech and Energy remain the favoured global sectors but investors rotated aggressively into Materials (9% to 21%) and out of consumer, pharma and industrials. Banks remain the largest U/W among global investors.
For the contrarians
Despite tail risk concerns in Europe, a clear risk-on message emerges from the survey; but with cash levels falling to low levels there are contrarian signals embedded in that message. At the very least we could see a balancing out of defensive vs. cyclical buying but the risk of a market correction now looks high. For contrarians the sells are commodities, EM equities, global tech and materials and the buys are cash, Japanese equities, global banks and utilities.
Click on chart to enlarge, courtesy of BofA Merrill Lynch.