The Bank of America (BoA)-Merrill Lynch survey of fund managers provides valuable clues about the behaviour of markets. In January, the survey had warned that the high level of its risk appetite index at 46 was a signal for a correction and that is what happened.
In February, the survey showed that investors were 12% overweight with cash and though BoA-Merrill Lynch said it wasn’t time for contrarians to buy, that cash began to be put to use as soon as concerns over Greece receded.
The survey for March puts cash balances at 3.8%, lower than February’s 4% but well above January’s 3.4%. We’re yet to go back to the gung-ho days of January. A net 46% of asset allocators are now overweight equities, compared with 33% in February and 52% in January. Moreover, investors now have cash equal to their benchmarks compared with 8% underweight in January. All these factors suggest there could be a bit more juice left in the current rally.
Graphic by Yogesh Kumar / Mint
Overweight positions in emerging markets, however, have been steadily coming down. For instance, a net 53% of investors were overweight emerging markets in November, 47% in January, 35% in February and 33% in March.
Funds are being rotated to the US—a fact corroborated by EPFR Global’s report that flows into US equity funds have been positive for four straight weeks, their longest winning streak since the third quarter of 2008. The paring of overweight positions not only protects against the risk of a sharp pullback, but also leaves the door open for positive surprises.
Interestingly, the underweight on India by global emerging market investors was pruned back substantially in March, while Asia-Pacific investors are now overweight India, in contrast to a significant underweight last month. That’s a reflection of the return of foreign institutional investor buying.
In commodities, a net 16% are overweight, up from 10% last month, but still below January’s 23%, which was close to an all-time high. In short, investor sentiment has bounced back from the February lows, but we still have a while to go before touching January’s unsustainable levels.
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