Global investors’ cash levels dropped to 4.9% in May after having shot
up to 5% in April from 4.6% the previous month, Bank of America Merrill Lynch reported
this week in releasing its May fund manager survey.
Cash levels were still above the 10-year average of 4.5% and still in
the “buy” zone, Merrill said.
The fund manager cash rule holds that when average cash balance rises
above 4.5%, a contrarian buy signal is generated for equities; when the cash
balance falls below 3.5%, a contrarian sell signal is generated.
Expectations for faster global growth continued their downward spiral, falling
to the lowest level in 27 months, with just net 1% of investors expecting the
global economy to strengthen over the next 12 months.
Higher inflation remained the consensus view in May, with net 79% of
investors expecting core CPI to rise over the next 12 months, slightly down
from 82% last month.
Only 2% of investors surveyed expected a recession this year. The
consensus view was that recession would begin in the first quarter of 2020.
Three-quarters of survey respondents thought that equities had not yet
peaked. The majority said that would not happen until 2019 or beyond; only 19%
thought the January rally marked the top.
“This month’s survey presents good and bad news,” Merrill’s chief
investment strategist, Michael Hartnett, said in a
“Although cash levels remain high and growth optimism is at the lowest
level in over two years, a majority of investors say there is room to grow in
this equity bull market and don’t see signs of recession anytime soon. Fund
managers think the May rally can extend in the near term.”
The survey was conducted from May 4 to May 10 among 223 panelists with a
total of $643 billion in assets under management.
Thirty percent of survey respondents said the biggest tail risk to the
market was a hawkish policy mistake by the U.S. Federal Reserve/European
Twenty-five percent cited a trade war as the top tail risk, well down
from 38% in the April survey; and 12% expressed concerns
about geopolitics causing oil to reach $100 a barrel.
Investors’ allocation to commodities stayed at net 6% overweight in May,
the highest level since April 2012 when West Texas Intermediate was $105 a
Long FAANG (Facebook, Apple, Amazon, Netflix and Google’s parent
Alphabet) + BAT (Baidu, Alibaba and Tencent) continued its reign as the most
crowded trade for the fourth consecutive month in May, cited by 29% of
Short U.S. Treasuries and short U.S. dollar followed, each cited by 17%
In May, global investors favored banks, technology and energy, while
avoiding staples, telecoms and utilities.
The allocation to banks rose by 10% from April to net 36% overweight,
the second highest level on record, and remained investors’ consensus long
position, according to Merrill.
Fund managers’ allocation to utilities slid by 3% to 37% underweight,
and was the consensus underweight. Merrill said the relative overweight banks
versus underweight utilities was now a fund manager survey record.
New ETF Survey
A new section in the May fund manager survey focused on exchange-traded
funds, to which three-quarters of the surveyed investors responded. Fifty-three
percent of these said they actively used ETFs in their portfolio.
Merrill noted that 20% (weighted average) of fund managers’ assets were
allocated to ETFs, much higher than the 11% ETF allocation of Merrill’s private
clients. Only one in 10 respondents said they invested more than 41% of their
portfolios in ETFs.
Fund managers’ ETF investing remained predominantly an equity-focused
activity, with 77% of survey participants saying they used them to gain equity
market exposure, compared with just 8% for corporate bonds and 5% for
Two-thirds of investors in the survey reported using ETFs to passively
track broad equity market indexes, while 12% focused on smart beta and 6% on
socially responsible thematics.
Nine percent of respondents said they used ETFs for leveraged/inverse
Investors said their chief reasons for adding ETFs to their portfolios
were liquidity, broad market exposure, hedging macro/political risks and
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