The Bank of America-Merrill Lynch (BoA-ML) survey of fund managers has been a good contrarian indicator. When risk levels get too high and cash with fund managers too low, it’s usually time to sell. The survey for November has plenty of warning signals.
Take the proportion of asset allocators overweight emerging markets—this is now at a net 56%, close to the record high of 57% seen in April 2004, before a major pullback in emerging markets. Average cash holdings with asset allocators are at a very low 3.5% (from 3.8% in October) and the survey says this low level “triggers a contrarian tactical sell signal for equities”. Recall that in April 2010 too, cash holdings were at 3.5% and the BSE Sensex fell thereafter from a high of around 18,000 in April to a low of slightly below 16,000 in May. A similar correction seems to be on this time too.
Also See Emerging Markets Send Contrarian Signals (Graphic)
There are more contrarian signals—a net 5% are underweight cash relative to their benchmarks compared with an overweight of 6% last month. In April, investors were 4% underweight cash. The BoA-ML risk indicator is now at 45, the highest level since April, when it was at 46. Hedge fund gearing continues to be at 1.44, the same as in October, but this level is the highest since early 2008. And asset allocators have raised equity weightings to a net 41% overweight. That’s much higher than October’s 27%, while in September only 10% of asset allocators were overweight equities, accounting for the smart rally since then. But the current level is still well below April’s 52% overweight equities. The froth extends to commodities as well, with a net 21% being overweight commodities—back in April, this level was at 20%.
But if there are so many sell signals, what is it that investors will sell? Among emerging markets, the survey shows that positions in China have increased to their highest levels since June 2009, in spite of lower optimism on Chinese growth. A sharp correction in China, therefore, is very likely and is indeed taking place at the moment. Russia, Indonesia and Brazil are the other favourites that are likely to see profit-taking. India, in contrast, is underweight for global emerging market investors, which should cushion the damage from a sell-off. The survey says that “the risk of a market correction now looks high. For contrarians, the sells are commodities, EM (emerging market) equities, global tech and materials, and the buys are cash, Japanese equities, global banks and utilities”.
Graphic by Yogesh Kumar/Mint
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