Asset managers are still holding high levels of cash. This is one of the findings of the most recent global fund manager fund survey carried out by Bank of America Merrill Lynch (BofAML) and bearing the witty headline Profits of Doom.
Another is that a record high number of investors surveyed are forecasting a Goldilocks investment landscape. BofAML defines the Goldilocks scenario as one that boasts above-trend growth and below-trend inflation.
The second finding is particularly striking. The survey suggests that fund managers are taking a risk-on attitude to investing even though a record number say they believe that stocks are overvalued. BoAML speaks of an ominous inflection point in profit expectations.
Cash stubbornly high
It says that cash remained unchanged at a stubbornly high 4.9% in the first full week of August during which the survey was carried out. Asset allocation to cash rose to its highest level for nine months.
BofAML takes the opportunity to remind readers of just how its fund manager survey cash rule works. When an average cash balance rises above 4.5%, a contrarian buy signal is generated for equities. When cash falls below 3.5% a contrarian sell signal is generated.
BofAML says its Global FMS Macro Indicator is currently in neutral territory, as FMS Macro conditions have peaked in recent months. This is based on a series of metrics including year-on-year change in inflation expectations, capex demand and risk appetite.
A buy signal is a rising macro indicator and rising cash level over the past two months. A sell signal is a falling indicator and cash down at least 50 basis points over two months.
Recession would be biggest surprise
Recession would be the biggest surprise for fund manager survey investors in the next six months. It was identified as such by some 53% of respondents, followed by inflation (25%). The investors say that the least surprising event would be an equity bubble (34%).
A policy mistake by the US Federal Reserve Bank or by the European Central Bank is identified by survey participants as the biggest tail risk. Second on that short list is a bond crash. Third comes North Korea.