It's not the US market, stupid, is the eye-catching headline on the September Bank of America Merrill Lynch global fund manager survey. The survey's writers Michael Hartnett, chief investment strategist, and Jared Woodward, investment strategist, identify three key talking points.
- Markets can remain in what they call Icarus upside mode for risk assets
- Mean reversion has become contrarian as investors cut expectation of higher bond yields
- US equity underweight positions are at a 10-year high and emerging market (EM) positions are at a seven-year high as US dollar bulls vanish
Michael Hartnett, chief investment strategist, BAML
Cash levels still high
Cash levels remain high (down from 4.9% to 4.8% but above the 4.5% average of the past decade). The survey records the largest jump in the number of investors "taking out protection" in 14 months, the lowest overweight position in equities since December 2016 and the smallest underweight position in bonds since November 2016.
No signs of irrational exuberance just yet, is the judgment. On mean reversion the survey identifies a rotation back to quantitative easing themes of scarce growth (eg in technology) and yield (eg EM), away from value (Japan and banks) as investors shun mean reversion, slash expectations for much higher bond yields.
On macro, FMS growth optimism continues to sag (+62% in January to +25% today). But profit hopes were up slightly this month (+34%) with greater conviction in earnings per share than gross domestic products. Notable divergence exists in FMS perceptions of fiscal policy (easy) versus flatter yield curve.
US tax reform is the most obvious catalyst for a steepening of the US curve.
Most crowded trades
- Long Bitcoin (up $1,000 to almost $5,000 early September)
- Long Nasdaq (up 20% year-to-date)
- Short US$ (-11% YTD; the authors note that long US$ was the most crowded trade as recently as March)
Jared Woodward, investment strategist, BAML
Biggest tail risks
- North Korea by some margin (this tallies with the September drop in Japan equity exposure) Federal Reserve/European Central Bank policy mistake
- Recession in the next six months is deemed to be the biggest potential surprise, and an equity bubble the least surprising
Contrarians would be
- Long US dollar
- Long US energy
- Short EM technology
- Long Japan banks
- Short eurozone discretionary/banks
The survey took place over the period 1-7 September. A total of 214 panellists with $629bn assets under management (AuM) participated; 181 participants with $549bn AuM responded to the Global FMS questions; 101 with $241bn AuM responded to the Regional FMS questions.