The Bank of America Merrill Lynch (BoA-ML) survey of fund managers for July had shown that there was plenty of fuel for a rally, with high cash balances with asset allocators and very high risk aversion.
That rally took place as expected, with the MSCI World index going up from 1,033 on 5 July to 1,152 by 2 August. Has the cash been used up then or is there still some juice left?
Also See Growing Risk Appetite (Graphic)
The survey for August shows that cash balances with fund managers fell to 3.8% from 4.4% in July. A net 10% of fund managers are overweight cash, compared with 18% a month ago. The proportion of asset allocators overweight equities is a net 12%, almost the same as the 11% in July.
The BoA-ML risk indicator, which had fallen to 35 in July, the lowest level since March 2009, is now back to 39.
The overall picture is cautious, but the risk indicator is still low compared with the first quarter of 2010, and fund managers were far more overweight on equities and underweight on cash at that time.
BoA-ML has said in the past that the danger mark for cash balances was 3.5% and below, from where a correction usually occurred. Cash balances are still above that level, but not by much. That limits the scope for a rally.
But there’s plenty of change happening at the regional level. Chinese growth expectations have troughed, which indicates that the Shanghai Composite Index, too, should move up, as it has already started to do. There has also been a big rotation out of US and Japanese equities into Europe and the UK.
Sentiment for emerging markets remains favourable, with a net 38% of fund managers overweight them, compared with 34% in July. The overweight on emerging markets has steadily risen from 19% in May to 38% in August.
Not surprisingly, the MSCI Emerging Markets has outperformed the MSCI World index over the period. With the overweight in August already high, emerging markets outperformance is likely to be lower, going ahead. Note, though, that the net overweight position is still well below the 47% overweight in January and the record 53% overweight emerging markets last November.
As far as India is concerned, global emerging market investors are neutral on the market, while Asia-Pacific investors pruned their underweight on India during the month.
Interestingly, while fund managers’ outlook on growth has improved, their expectations of interest rate increases have been pushed back further. That should support asset prices.
Graphic by Ahmed Raza Khan/Mint
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