Portfolio managers were as shaken as individual investors by last week's market turmoil, according to the results of the latest
Bank of America Merrill Lynch global survey of fund managers.
The survey polled 176 fund managers who oversee a total of $551 billion in assets Aug. 5-11 and found their views on the global economy and corporate profits had deteriorated dramatically from last month. Their average cash levels climbed to 5.2% — just slightly less than the recent peak of 5.5% in December 2008 at the depth of the financial crisis. A net 30% of the group thinks that global corporate profits will deteriorate over the next 12 months. By comparison, in last month's survey, a net 11% thought conditions would improve.
The reversal of sentiment among managers was one of the sharpest the survey has ever recorded. A net 1% of the group is now underweight in U.S. equities compared to a 23% overweight in July. A net 14% of U.S. fund managers in the group now believe the U.S. economy will weaken versus 29% who felt two months ago that the economy would strengthen.
Europe, despite the continuing pessimism on economic prospects for the region, did better. The percentage of global managers underweighted to European stocks dropped from 21% in July to 15% in August. Seventy-one percent of European managers thought the region's economy would weaken; 22% said the same last month.
Optimism continues to be highest for China and other emerging markets. A net 11% of fund managers in those regions think the Chinese economy will weaken. By comparison, 24% felt that way in July and 40% in June. The percentage of global managers overweight the region fell to 27%, from 35%.
“Flows out of equities into cash have reached capitulation levels, especially in the U.S., but it's significant that a revival in optimism towards China has survived the global correction,” said Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research.
The large move to cash by portfolio managers is a contrarian “buy” signal, according to BAML. After periods in which cash levels have risen to these high levels, global equities have on average have rallied 5.9% over the next four weeks.
The biggest sector allocation moves were out of cyclical stocks, especially industrials, energy and materials. With business cycle risk identified by three-fourths of the respondents as the biggest risk to market stability, allocation sentiments toward industrial stocks swung 27% from July to August. Sixteen percent are now underweight industrials compared to the 11% who were overweight the sector last month. The managers continue to be underweight banks and are less overweight in energy stocks than in July.
The biggest positive moves in sector allocations were into technology stocks (5%), telecoms (4%), and staples (3%).
Some other interesting items in the survey:
-The biggest “tail risk” seen by the portfolio managers was European Union sovereign-debt funding.
-The percentage of respondents who ruled out the prospect of another round of quantitative easing by the
Federal Reserve Board fell to 22%, from 40%.
-Inflation expectations fell dramatically, with a net 6% of managers now believing inflation will be lower in the next 12 months. Last month, a net 28% felt it would be higher. Twenty-five percent of the group expects interest rates to rise; 72% thought that last month.
-With gold surging for much of the last two weeks, a net 43% of the group now feels gold is overvalued. A net 17% felt that way in July.
