The March FMS shows a scaling back of investor optimism as high commodity prices sap confidence in corporate profitability and global growth. It feels like wait & see rather than risk aversion; cash is replenished but this could reverse with easing MENA geopolitics or if the ECB threat of higher rates proves over-played.
Inflation risk, but not in corporate margins
Global inflation expectations remain high at 75%. A net 31% see stronger global growth but down from 58% last month and broadly similar to the fall in profit expectations (32% from 51%); a net 24% see corporate profit margins falling compared to 10% expecting an increase back in Jan.
Gulf in rate expectations
A slight shortening in views on Fed rate hikes was trumped by wholesale buy-in toECB rate rhetoric with 72% now expecting a rate rise in Q2 (vs. 0% last month). In light of agreement being reached on an expanded EFSF, this may be premature.
Cash sell signal closed
The FMS Risk Appetite Index fell back to 41 (from 47) the lowest in six months. Hedge fund net exposure fell to 34% (from 39% in Feb) and cash increased to 4.1% up sharply from 3.5% last month. This closes the cash sell signal triggered last month since when global equities have fallen by c.3%.
Equities out, but bonds not in
Equities (45% O/W vs. 65%) and commodities (21% O/W vs. 28%) were cut in favour of cash (14% O/W from 9% U/W). However, bonds saw very little benefit with the U/W closing only modestly to 59% from 66% in Feb.
Regional conviction at lowest level in 10 years
EM exposure fell to 0% from 5% O/W. The US was cut to 23% O/W from 34%, with both EU and Japan at 8% O/W (note: the survey closed before news of the Japan earthquake). This puts regional conviction at the lowest level since Jul-01.
Pharma added, but staying pro-cyclical
Pharma had the biggest jump on the month (10% O/W from 4% U/W) but investors remain resolutely pro-cyclical with tech, energy, materials and industrials the top-4 preferred sectors.
The FMS contrarian trades
Long bonds: short cash, equity, commodities. Short tech; long utilities. Long regional dispersion.
Wednesday, March 16, 2011
Merrill's Global Fund Managers "Wait & see"
While the world melts down with nuclear swan nests in Japan, key messages from BofA Merrill Lynch Global Fund Manager Survey are as follows: