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Global Fund Managers Chant ‘U-S-A’ in June: Merrill

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Global investors swarmed back into U.S. equities in June, Bank of America Merrill Lynch reported this week.

Merrill’s latest fund manager survey found that U.S. equity allocations shot up 16 percentage points from May to net 1% overweight. This was the first time survey respondents had gone overweight in 15 months.

In contrast, the eurozone lost its position as the most-favored region for equities, dropping 13 points to an 18-month low of 20% overweight — the biggest drop since the July 2016 Brexit vote.

Emerging market equities fell again in June after last month’s massive sell-off, to net 22% overweight, as investors reallocated to U.S. equities.

“Investors have their eyes on the U.S. this month, with a record high favorable outlook for profits and a return to U.S. equity allocation,” Merrill’s chief investments strategist Michael Hartnett said in a statement. “Decoupling is back in vogue.”

The survey, conducted June 1 to June 7, comprised 235 panelists with $684 billion in assets under management.

Fund managers’ average cash balance ticked down to 4.8% in June from the previous month’s 4.9%, still above the 10-year average of 4.5%.

The fund manager cash rule holds that when average cash balance rises above 4.5%, a contrarian buy signal is generated for equities; when the cash balance falls below 3.5%, a contrarian sell signal is generated.

Sixty-four percent of survey respondents, a 17-year high, said the U.S. had the most favorable outlook for profits, whereas all other regions had a negative one.

At the same time, a record 42% of investors said companies were overleveraged, way above the 32% peak in 2008.

Long FAANG (Facebook, Apple, Amazon, Netflix and Google’s parent Alphabet) + BAT (Baidu, Alibaba and Tencent) continued as the most crowded trade in June, identified by 41% of investors, up from 29% in May.

Sixteen percent of respondents cited short U.S. Treasuries and 9% long U.S. dollar.

In June, allocation to commodities hit an eight-year high, rising one percentage point to net 7% overweight, the highest since April 2012 when West Texas Intermediate was $105 a barrel.

Investors’ expectations for faster global growth held steady in June, with only net 1% saying they thought the global economy would strengthen over the next 12 months —  barely above the boom/bust threshold, Merrill noted, and still at the lowest level since February 2016.

This month, 31% of respondents said a trade war was the biggest tail risk to the markets. Trade tensions have been a major macro concern for investors this year.

Twenty-six percent of fund managers cited a hawkish policy mistake by the U.S. Federal Reserve/European Central Bank as the biggest tail risk, and 23% said it was a euro/emerging markets debt crisis.

Merrill said that since 2011, these tail risks have dominated investors’ concerns:

  • Eurozone debt and potential breakdown
  • Chinese growth
  • Political populism
  • Quantitative tightening
  • Trade wars

When asked why the Fed would be most likely to stop tightening, 69% of fund managers pointed to domestic catalysts: lower inflation, higher unemployment and Fed independence; and 23% cited emerging market contagion or a debt crisis in the peripheral EU.

Passive Investing and ETFs

Last month, Merrill’s fund manager survey introduced a section on passive investments and exchange-traded funds.

Seventy-six percent of participants in the June survey responded to the new section, 49% saying they actively used ETFs within their portfolios.

According to the survey, 20% (weighted average) of fund managers’ assets were allocated to ETFs, well above the 11% ETF allocation of Merrill’s private clients. Only 11% of respondents said they invested more than 41% of their portfolios in ETFs.

The survey found that fund managers’ ETF investing remained predominantly equity focused, with 76% using them to gain equity market exposure, versus 7% for corporate bonds and 4% for government bonds.

Seventy-one percent of investors reported that they used ETFs to passively track broad equity market indices. Smart beta and socially responsible thematics trailed at 12% and 6% usage.

Nine percent of investors said they used ETFs for leveraged/inverse positions, the same as in the May survey.

— Check out SIFMA Economists Expect Stronger Growth, Higher Rates on ThinkAdvisor.


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