Investors Selectively Lowering Risk After Bond Sell-off

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Global investors have less appetite for higher risk exposures, particularly in the U.S., according to the BofA Merrill Lynch Fund Manager Survey for May.

While a net 47 percent of respondents remain overweight equities, this is down seven percentage points month-on-month. Appetite for U.S. stocks has declined to a net 19 percent underweight, in contrast to strong overweights across Q1. Confidence in corporate profitability has also fallen, with only 7 percent of investors viewing the U.S. as the region with the most favorable earnings outlook. Long U.S. dollar remains investment markets’ most crowded trade, in fund managers’ view. However, the survey’s 41 percent reading on this measure has fallen sharply from last month.

At the same time, overweight cash positions have risen sharply. This month’s reading of a net 23 percent is the survey’s highest since December 2014.

These shifts follow the recent aggressive sell-off in bond markets. The survey shows a strong rise in panelists’ assessment of bonds as the asset class most vulnerable to volatility in 2015 – up to 56 percent. Bond underweights have also increased.

Investors’ macroeconomic views have changed little since last month. A net 59 percent still expect the global economy to strengthen this year, though forecasts of corporate profitability have fallen a little. Seventy percent of respondents see both growth and inflation remaining below historical trends over the next 12 months.

They are increasingly divided over the timing of a U.S. rate rise, however. Almost as many now see this in 4Q as in 3Q – 36 percent versus 45 percent, respectively.

“There is no loss of faith in economic recovery, and positioning still assumes that the U.S. dollar goes up, but doubts are creeping in – hence this jump in allocation to cash,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. “Investors are keeping faith with European stocks for now, but this remains biased towards currency plays,” said James Barty, head of European equity strategy.

Europe and Japan still preferred

In contrast to their reduced conviction towards U.S. equities, which a net 39 percent now intend to underweight over the next year, investors remain positive on both Europe and Japan – both economies where quantitative easing continues. A respective net 49 and 42 percent of fund managers are overweight the two markets.

Europe also remains the market most would like to overweight from a 12-month perspective. A net 33 percent still take this position, although this is now down as much as 30 percentage points from March’s very strong reading.

A net 18 percent make Japan their top pick for the coming year. This is a slight decline from last month.

At the same time, fund managers are less negative on emerging markets. Only a net 6 percent are now underweight, compared to April’s net 18 percent. Intention to own emerging markets stocks over the next year has risen similarly.

U.K. picks up

Britain’s recent decisive election result is reflected in investors’ more positive stance on U.K. assets. Global investors have halved their equity underweights month-on-month, while a net 3 percent of European fund managers now intend to overweight the U.K. market over the next 12 months. Last month, a net 50 percent said they would underweight it over this time period.

Similarly, views of sterling as overvalued have fallen notably. Only a net 8 percent of global fund managers now take this stance, compared to April’s net 15 percent.

Currency correlation

Investors’ stance on the major currencies correlates with their equity positioning. A net 69 percent expect the U.S. dollar to appreciate over the next 12 months. This is up slightly from April’s reading. In contrast, a net 32 and 35 percent expect the Euro and yen to decline. Yen bearishness has risen by 16 percentage points since March.

Bullishness on oil has fallen, meanwhile. Fewer than half of fund managers now expect the commodity to trade at a higher price in 12 months’ time. This is down significantly from April and March’s reading of 64 percent.

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