Merrill: Investors are 'index hugging' and moving to cash

Investors doubled their holdings in cash this month to the highest levels in more than a year as money managers remain divided on the outlook for the global economy, a BofA Merrill Lynch Global Research survey showed.
SEP 14, 2010
Investors doubled their holdings in cash this month to the highest levels in more than a year as money managers remain divided on the outlook for the global economy, a BofA Merrill Lynch Global Research survey showed. A net 20 percent of respondents, who together manage about $579 billion, were “overweight” cash versus benchmarks as money managers reduced their holdings in equities and commodities. Even so, hedge-fund gearing levels jumped to a two- year high. The MSCI World Index last week capped its first back-to- back weekly gain in a month. Still, concern that the recovery is faltering has pushed the gauge of stocks in 24 developed countries down 7.1 percent from its 2010 high in April. “There is a lack of conviction in the market,” Gary Baker, head of European equity strategy at BofA Merrill Lynch, said today at a press briefing in London. “Investors are hunkering down and index hugging, but they are poorly positioned for any upside surprises.” Global fund managers are evenly split on prospects for global economic improvement over the next 12 months with the survey showing a reading of zero. This compares with 5 percent who expected stronger growth last month and 42 percent four months ago. Scaled Back Asset allocators scaled back their holding in equities in September with a net 10 percent now “overweight” the asset class, compared with 12 percent last and 52 percent in April. Holdings in commodities were also reduced to a net 4 percent “overweight” from 9 percent last month. Still, hedge-fund gearing levels, or the current ratio of gross assets relative to capital, jumped in September to 1.39. That’s up from 1.16 last month and is the highest reported level since early 2008. “It’s a tentative sign that hedge funds might be starting to participate in the market again after a quiet summer,” said Baker. In this type of market “ any small news flow can have a disproportionate effect which could be viewed as very fertile ground for hedge funds.” As of January last year, Merrill Lynch changed the format of its survey and no longer publishes full historical data. A total of 215 fund managers participated in this month’s survey, which was conducted between Sept. 2 and Sept. 9.

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