A Bank of America-Merrill Lynch August survey of fund managers (carried out during 7-13 August) shows that cash balances with global fund managers are at very low levels, as they poured money into equities. Cash balances are down from 4.2% in June and 4.7% in July to 3.5%—the lowest since July 2007. Less cash left to funnel into equities could account for the stock markets starting to run out of steam.
By contrast, the allocation to equities has risen very sharply to 34%, up from a mere 7% in July. This is the highest allocation to equities since October 2007. Fund managers are positioning themselves to take advantage of what 75% of them think will be a global recovery in the next 12 months. That has led to the revival in risk appetite, with the Merrill Lynch risk index rising to 41%, the highest since July 2007.
The survey points out, though, that there’s an undercurrent of nervousness about the strength of the recovery. It says, “Four out of five investors predict a ‘below trend’ recovery and neither regional nor sector positions are extreme. The optimism is skin-deep.”
Emerging markets are the only overweight region, with a net 52% of fund managers overweight, a slight dip from 54% in July. What’s interesting is that the overweight on China is now down to two-year-low levels and is now almost the same as for India and Korea and well below the overweight on Russia, Indonesia, Turkey, Thailand and Brazil, in that order. Compare that with China being the most preferred market in June and there’s your reason for the recent fall in the Chinese markets.
What does this mean for investors? The survey says that because optimism about a global recovery is so high, any weakness in news flow and data could lead to sell-offs in the market. That will hold true of emerging markets, too, where optimism about earnings growth is high. Merrill Lynch advice, though, is to buy on these dips as it would help investors position themselves for the eventual recovery. They compare the current situation with the one in June 2003, when the market paused for a few months in a nascent bull market before resuming.
It’s debatable whether this is indeed the start of a global bull market. Indeed, the fund managers surveyed have pointed out that the recovery is likely to be weak. But a buy-on-dips argument makes sense in emerging markets, if you position yourself for the long-term on the assumption that growth can only increase and liquidity will support the downside.
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