Is the Bank of America-Merrill Lynch survey giving a buy signal? The survey has usually been used as a contrarian indicator, with investors advised to exit crowded trades. By that yardstick, there’s plenty to chew on in the February survey. Cash balances are up to 4%, the proportion of investors overweight equities has dipped sharply from 52% in January to a net 33%, investors are now 12% overweight cash compared with 8% underweight in January, their risk appetite index is down to 42 from 46 in January and the proportion of investors overweight emerging market equities dipped from 47% to 35%.
In January, BoA-Merrill Lynch had warned that the high levels of risk appetite presaged a correction, which is exactly what happened. It, however, advises investors not to jump back into the markets just yet. That’s because, it says February sentiment is cautious enough to steady markets but not yet pessimistic enough for an unambiguous contrarian buy signal.
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What kind of trades should contrarian investors initiate? The firm suggests that contrarian investors “should be positioned for the following: US dollar depreciation, yen or euro appreciation, global bank outperformance, tech sector underperformance, UK equity outperformance, lower bond yields”. It also says that investors looking to buy emerging market stocks should wait for more bullish price action from Chinese equities and the US dollar.
A net 59% of global emerging market fund managers are underweight in the Indian market. Although steep valuation is the reason for this, it does increase the odds of a rally should the finance minister spring a pleasant surprise in the Union Budget.