Cash levels with fund managers and risk appetite are back to levels reached in January, presaging a market correction. A Bank of America-Merrill Lynch fund manager survey for April found that cash balances with fund managers have declined to 3.5% from 3.8% in March. The report says that in four out of the past five occasions that cash balances fell to 3.5% or below, the markets corrected by 7.1% in the next four weeks. In January, when we had the last correction, cash balances were at 3.4%.
Other indicators, too, are flashing red. The survey’s risk appetite index is back to its January level of 46, up from 42 in February and 44 in March. A net 52% of asset allocators are now overweight equities, the same level in January and compared with 33% in February and 46% in March. Investors are now 4% underweight on cash, compared with 8% underweight in January.
As the recovery gathers steam, investors have been putting their money in equities. “This month’s FMS (fund managers’ survey) shows investors expect robust growth, big corporate profits, and contained inflation—the full Goldilocks. This complacency is best-reflected by the sharp fall in investor views on credit-default risk; only 37% of fund managers thought credit-default risk was ‘above normal’ in April (versus 54% in March),” the lender said.
Graphic: Yogesh Kumar/Mint
A record 71% of investors believe that, globally, corporate earnings will rise by at least 10% this year, well above the 63% who believed that in January. But low cash levels indicate the rally is running out of steam.
There is though a big difference between January and April. In January, a net 47% of investors were overweight emerging markets; that has come down to 31%. The survey says positions now look less stretched than at the end of 2009. So a correction in global equities may not be felt that deeply in emerging markets.
Investors have also increased their exposure to commodities, with a net 20% now overweight on commodities, compared with 16% in March. In January, a net 23% was overweight on commodities.
What about India? The outlook is mixed, with emerging market investors being heavily underweight India, but Asia-Pacific investors overweight the country.
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