Investors slash equities, pile into cash amid growth fears
Investors have slashed profit expectations and equity allocations by record levels and bolstered their cash positions in a startling indication of evaporating risk appetite amid global growth fears.
Average cash balances surged to 5.2% in August, closing in on the 5.5% high of December 2008, finds Bank of America-Merrill Lynch in its global fund manager survey.
It should be noted, however, that the survey of 244 panellists with total AUM of $718 billion was carried out from August 5 to August 11, when world equities plunged over 12% following agency Standard & Poor’s decision to downgrade the US’s long-term sovereign credit rating.
The survey found global growth expectations tumble, with a net 13% forecasting that the world economy is headed for weaker growth – a big swing from July when a net 19% had confidence it would improve. A net 30% believe the profit outlook will deteriorate in the coming 12 months.
Expectations of QE3 have doubled: 60% now see 1,100 points or below on the S&P500 Index as a trigger for QE3, up from 28% last month, and global fiscal policy is now described as restrictive for the first time since March 2009.
Fund managers scaled back their equity positions faster in August than in any previous month in this survey. A net 2% remain overweight equities, down from a net 35% in July.
Equities are now seen as at their cheapest ever in survey history, with 48% viewing them as undervalued. In contrast, 62% see bonds as overvalued, against 59% last month.
Tellingly, emerging markets are the only region where fund managers are overweight, and even then that weighting was trimmed by eight percentage points to 27%. US equity weightings were chopped from 23% to -1%, while managers remain neutral on Japan and underweight the eurozone.
Stable emerging market allocation can partly be explained by an improving outlook on China. A net 11% of EM fund managers still believe China’s economy will weaken, but that is down from 24% in July and a net 40% in June.
“Flows out of equities into cash have reached capitulation levels, especially in the US, but it’s significant that a revival in optimism towards China has survived the global correction,” notes Michael Hartnett, chief global equity strategist at BoA Merrill Global Research.
A separate survey of nearly 50 Asian fund managers by Russell Investment finds strong investment bias towards Asia, with 83% aligning portfolios to the region’s consumer growth story. A total of 63% were positive on China and said they had become less anxious about a hard landing, with managers downplaying local debt and contagion fears.
The BoA Merrill survey saw the economic outlook for Europe sink, with 71% expecting the economy to weaken over the coming year, from 22% last month. A net 53% of respondents see weaker earnings-per-share growth over the next 12 months.
Both readings are the lowest since March 2009. While 45% see no recession over the coming year, that compares with 83% two months ago.
Yet the eurozone was the only region to see equity allocations rise this month: a net -15% of asset allocators are now underweight, compared with -21% in July. The UK has the biggest regional underweight at -25%.
On a global basis, asset allocators exited cyclical stocks en masse. Industrials suffered a negative 27 percentage point change, while the proportion of respondents overweight energy stocks declined to a net 14%, from 27% a month ago. Banks remain a heavy underweight, although overall the net month-on-month swing was a modest four percentage points.
In Europe, investors rotated sharply into defensives and out of cyclicals, while financials saw small gains. The most popular sector is still oil & gas, followed by food and beverages, autos and industrials. Banks remain the least popular sector.
It is a similar story in Asia-Pacific. Autos (+38%), retail (+19%) and staples (+19%) continue to be the most favoured sectors; least liked are utilities (-56%), insurance (-31%) and media (-25%). Banks were cut sharply to underweight (-25%).