The January Bank of America-Merrill Lynch (BoA-ML) survey of fund managers shows that the levels of complacency are very high. The survey’s risk and liquidity indicator is at its highest level since May 2006. At 46, it’s also a bit higher than the 44 level at which it had remained stuck during the last quarter of 2009. That rebound in risk appetite was mirrored in cash levels falling to 3.4% at the global level from 4% in December. Asset allocators are now 8% underweight cash, compared with 3% overweight in December. That asset managers put their cash to work in January is seen from the rise in the MSCI World index by 2.5% and the MSCI Emerging Markets index by 2.3% so far this month. What’s the reason for the resurgence of risk appetite? Fund managers believe that policy will continue to be stimulatory and that the US Federal Reserve will not hike interest rates till the end of September. In other words, liquidity will continue to be abundant. But low cash levels could mean that there’s no fuel left at the moment for pushing equities up further.
The survey shows that a net 47% of investors are now overweight emerging markets, up from 45% in December, but still lower than the 53% who were overweight in November. Nevertheless, BoA-ML warns: “Positioning is at historically extreme levels so any correction in global equities would be felt deeply in EM (emerging markets)”. It also points out that low market volatility (seen in the low levels for the VIX, for instance), matched with low levels of cash with fund managers and rising exposure to unloved, deep cyclicals such as Japan and banks show “investors are close to being all-in”. That raises the risk of an earlier correction in the equity markets than what the consensus expects. They, however, say that equity corrections should be bought.
Incidentally, the August survey had also warned that, because optimism about a global recovery was so high, any weakness in news flow and data could lead to sell-offs in the market. In July, a net 54% of investors were overweight emerging markets. BoA-ML’s advice at the time was to buy on these dips as it would help investors position themselves for the eventual recovery. That advice has worked very well.
Also, investor preferences regarding corporate cash flows have changed with a net 40% now saying that companies should go in for capital expenditure rather than repair balance sheets. BoA-ML regards this as a tipping point because the last time this happened was in October 2003, which led to the long boom of 2003-07 for equities.
The January survey also shows that investors are now overweight India, although China, Taiwan and South Korea are the favourites in the Asia-Pacific region.