During 4Q12 and 1Q13. fund managers were reducing cash, overweighting equities and underweighting bonds to levels that are close to the bullish extremes seen at prior equity tops. Equity exposure in March, for example, was the second highest since the survey began in 2001.
Overall, fund managers are still bullish on risk, but less so than in March and April. In April, cash levels rose to 4.3%, in the middle of the range; they remain there in May. Equity allocations were reduced to 41% overweight; still near the high end of the range. Bonds remained underweight at a net 38%.
Recall that these are global fund managers, so reducing some risk in the past two months reflects deterioration in European and emerging markets, especially China. The US market has been diverging higher. In response, fund managers have maintained their overweight bet on the US at 20%. They were 3% underweight the US in January, for comparison. Europe was reduced to 8% underweight in April and May; it had been 15% overweight in January. Managers are now more overweight Japan (31%) than at any time since mid-2006.
You can see from the data that it should be looked at from a contrarian perspective. Fund managers were overweight EEM more than any other market at the start of the year, and it has been the worst performer so far. They are now becoming bearish EEM (3% overweight), so keep it on your radar. They are also more underweight commodities (29%) than at any time since 2008. In comparison, they were 20% underweight Japan in December and it has been the best equity market by far in 2013.
Survey details are below.
- Cash: Cash balances remained 4.3%, the same as April (vs 3.8% in January and February, and 4.1% in December 2012). Typical range is 3.5-5%. BAML has a 4.5% contrarian buy level. More on this indicator here.
- Equities: A net 41% are overweight global equities, a 6 percentage point decline from last month (vs 57% in March, 51% in February). March was the second highest equity exposure since the survey began in April 2001. In comparison, it was 35% in December 2012. More on this indicator here.
- Bonds: A net 38% are now underweight bonds, a decrease from 53% in March and 50% in April. March was the lowest weighting since May 2011.
- Regions: EEM had been the most favored region (overweight 43% in February) but this fell to +3% in May, 1.3 standard deviations below its 10-year average.
- Managers are 20% overweight the US (same as April, vs 14% overweight in March and 3% underweight in January), the highest since June 2012.
- They are the most overweight (31%) Japan since 2006 (versus+20% in April, +15% in March, +7% in February and underweight by -20% in December).
- Europe was maintained at 8% underweight from 4% overweight in March (+8% in February and +15% in January). Net 38% view EZ equities as undervalued, up from 23% in April.
- Sectors: Sector weighting reflect skepticism over emerging markets, especially China. Commodities are 29% underweight (-18% in April, -11% in March, -1% in February), the lowest since December 2008. Energy is net 17% underweight.
- Macro: Inflation expectations continue to fall; a net 30% expect global core inflation to rise in the next 12-months, down from 45% in April.