Market Direction and Stock Trends

[DiscoverGold]

Fund Managers' Current Asset Allocation - November
By: Urban Carmel | November 17, 2017

Summary: Global equities have risen 18% so far in 2017 and yet, until this month, fund managers have held significant amounts of cash and been, at best, only modestly bullish on equities. All of this has suggested lingering risk aversion.

That has now changed. Cash levels have fallen to the lowest level in 4 years. Allocations to global equities have risen to the highest level in 2-1/2 years. In most respects, investors are now bullish.

In the past 6 months, US equities have outperformed Europe by 10% and the rest the world by 3%. Despite this, fund managers remain underweight. US equities should outperform their global peers.

Fund managers are underweight global bonds, nearly to an extreme that has often marked a capitulation low in the past. Only 5% of fund managers believe global rates will be lower next year, a level at which yields have often fallen.

* * *

Among the various ways of measuring investor sentiment, the BAML survey of global fund managers is one of the better as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b in assets.

The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal. We did a recap of this pattern in December 2014 (post).

Let's review the highlights from the past month.

Overall: Relative to history, fund managers are overweight equities and underweight bonds. Cash is now neutral. Enlarge any image by clicking on it.

Within equities, the US is significantly underweight while Europe, Japan and emerging markets are significantly overweight.

A pure contrarian would overweight US equities relative to Europe, Japan and emerging markets, and overweight global bonds relative to a 60-30-10 basket.



Cash: Cash is now neutral at 4.4% (BAML considers cash levels above 4.5% to be a contrarian long for equities). Cash had been a consistent tailwind for equities until this month. A recap:

Fund managers' cash levels rose to 5.8% in October 2016, the highest cash level since November 2001. This set up a contrarian long in equities.

Cash remained above 5% for almost all of 2016 and into early 2017, the longest stretch of elevated cash in the survey's history. Cash remained near 5% until October 2017.

In November, cash fell to 4.4%, the lowest level since October 2013. At current cash levels, a tailwind behind the rally is gone. A further drop in cash in the month(s) ahead would be decisively bearish.



A composite measure of risk (based on allocations to cash, higher risk assets and investment horizon) remains neutral despite the long rally in equities. . .

* * *

http://fat-pitch.blogspot.com/2017/11/fund-managers-current-asset-allocation.html#more

• DiscoverGold

Click on "In reply to", for Authors past commentaries