Thursday, April 14, 2011

Merrill's Fund Managers Are "Reluctant Equity Bulls"

While the last month was "Wait & see", this month key messages from BofA Merrill Lynch Global Fund Manager Survey are as follows:

Equities: a reluctant default position

In the April FMS, global growth expectations fell for the second consecutive month while inflation expectations remain high. But with no imminent change in Fed policy anticipated and bonds looking more risky, investors feel compelled to stay in stocks. Equity allocations rose in April despite another sharp drop in profit expectations: a net 19% see higher profits in the next 12m, down from 32% last month and 51% in Feb.

Monetary policy: gone wild
A net 51% of investors regard monetary policy as too stimulative, the highest level since July 2004, and commodity price inflation is now regarded as the largest tail risk for financial markets. Just 6% of the panel think long-term interest rates will be lower in 12 months’ time. Liquidity expectations remain high, nonetheless, with Q1-2012 seen as the most likely date for the first Fed rate hike.

Equity risk-reward: poor
Cash balances fell to 3.7% from 4.1%. No sell-signal is triggered for equities but upside looks constrained. Risk-taking has increased: our Risk Appetite index is at 45 vs. a long-term avg of 40; levels of hedge fund gearing rose to 1.49 from 1.38.

Asset allocation: equities over bonds and cash
The equity risk premium for investors continues to fall (3.79% vs. 3.86%) and supports an increase in equity allocation (net 50% O/W from 45%). The big U/W in bonds (58%) continues and cash O/W was cut to 10% from 14%. A long position in commodities was extended, rising to 24% from 21% in March.

Regions: out of Japan, back into Emerging Markets
In a growth-constrained world, investors want profit visibility and this month sees a big rotation out of Japan (to an 18% U/W from an 8% O/W) back into Emerging Markets (to a net 22% O/W from neutral in March). The US remains the most favoured region at 30% O/W while the consensus is neutral on Europe.

Sectors: Energy now #1 sector; but defensive shift
Energy is now the most popular sector at a net 40% O/W displacing the under performing tech sector. But the sector mood is more defensive with rotation into utilities, pharma, staples & telecom, out of discretionary, industrials and materials. Financials remain stubbornly unpopular; the net global position falling to 15% UW.

Contrarian trades
Long bonds, short equities/commodities; long Japan equities, short EM; long Europe equities, short US; long consumer discretionary, short energy; long utilities, short tech/ industrials.

Let's ride the biggest "tail risk"? Click on chart to enlarge, courtesy of BofAML.

I prefer to be contrarian ...

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