An extreme in bullish equity sentiment has been reached. In July, fund manager equity weightings increased to +61% overweight. This is the highest since February 2011 and the second highest since the survey began in 2001.
In the past, when near 60% overweight, the risk/reward for equities has been unfavorable over the next several months (yellow shading). In 2011, SPX rose 2% versus falling 6% over the next 6 months. This culminated in a 20% fall in August 2011. The other prior examples of excessive bullish sentiment also resulted in poor risk/reward over the following months (chart from Short Side of Long).
In the world's largest equity market, the US, equity allocations remained +10% overweight in July. Exposure is essentially neutral. Given how strongly the US has outperformed the rest of the world in the past several years, exposure is surprisingly low. It is not over-owned until weightings are +20%.
Remarkably, although US bonds have outperformed SPX so far in 2014, fund managers are still hugely underweight. In July, weightings fell to their lowest in more than 6 months. If there is a hated asset class, it's not equities, it's bonds.
In July, 71% of fund managers said they believe global core CPI will be higher in the next 12 months. This is the highest percent holding this view since March 2011. In the next 6 months, US 10-year yields fell from 3.6% to 1.7%.
Globally, managers are not just overweight equity and underweight bonds, they are overweight the highest beta equity (banks, discretionary) and underweight defensives (telecom, staples, utilities).
That is equally true in the US, where tech is the most favored sector, by far, and utilities are still very underweighted.
Survey details are below.
- Cash (+4.5%): Cash balances remain 4.5%. It has been in a 4.4% to 4.8% range since July 2013. Typical range is 3.5-5%. BAML has a 4.5% contrarian buy level but we consider over 5% to be a better signal. More on this indicator here.
- Equities (+61%): A net +61% are overweight global equities, the second highest since the survey began in 2001 and the highest since 67% in February 2011. It was +37% in May and +48% in June. A washout low would be under +15%. More on this indicator here.
- Bonds (-64%): A net -64% are now underweight bonds, a large drop from May (-55%) and the lowest weighting in more than 6 months. In November, it was the second lowest ever (-69%). For comparison, they were -38% underweight in May 2013 before a large fall in bond prices.
- Europe (+35%): Europe is the most preferred region for the 11th month in a row. Managers are +35% overweight, a sharp drop from +43% overweight in June. +46% overweight in October was the highest weighting since June 2007.
- Japan (+26%): Managers are +26% overweight Japan, a sharp increase from +7% in May. Funds were -20% underweight in December 2012 when the Japanese rally began.
- US (+10%): Managers maintained their US weighting at +10%, up from +6% in May. They had been +30% overweight in August 2013 (the third highest US weighting ever).
- EEM (+5%): Managers maintained their +5% overweight EEM for a second month, the highest weighting in 15 months. It had been -31% underweight in March, which was a new low since the survey began in 2001. BAML considers current levels to be a contrarian buy.
- Commodities (-15%): Managers commodity exposure remains largely unchanged the past several months. It is 1 standard deviation below the 10 year mean. They were -31% underweight in December, the third lowest on record. Low commodity exposure goes in hand with skepticism over EEM.
- Macro: 69% expect a stronger global economy over the next 12 months, an increase from 62% in March and April and 66% in June. January was 75%, the highest reading in 3 years. This compares to just 40% in December 2012, on the eve of the current rally.