Merrill Lynch Fund Managers Survey, which surveyed an overall total of 254 panellists with $754bn AUM, in a period between 4th to 10th January 2013 showed that investors bullishness surged to extremes. The chart abodes shows that risk appetite is the second highest in surveys history. Current readings should be a worry for bulls, and they are just about everywhere these days. On previous two occasions of appetite reaching these extremes, in April 2010 and February 2011, the market eventually suffered a crash (flash crash and US debt downgrade respectively). Merrill Lynch summarises the mood by stating that:
“Investors enter 2013 as bullish as they have been in two years. Growth and risk metrics are at multi-year highs and, most glaringly, investors are OW bank stocks for the first time since 2007.”
“Growth optimism surged to a 33-month high. Optimism on Chinese growth remains robust. A net 63% expect a stronger Chinese economy over the next 12 months, the second highest reading on record.”
On the other hand, fund managers are taking “larger-than-normal” risk (shown in the Chart 1), while the number “taking out market protection” fell to the lowest reading since the survey question was introduced. Once again, similar readings were wittiness in April 2010 and February 2011, and eventually markets corrected meaningfully. Bulls better hope that economy and earnings picture really picks up to justify this much greed, otherwise a lot of investors might be in for a disappointment. I hold my doubts.
“Bullish expectations on growth, profits and margins have finally translated into higher equity allocations. A net 51% of investors are OW equities, most bullish since February 2011.”
At the same time, “allocation to bonds fell to lowest level since May 2011”. Furthermore, cash levels fell for “the sixth consecutive month and are now the lowest since April 2011″ (last major top in risk assets). The Merrill Lynch Fund Managers Survey title is “The Bears go into hibernation” and there is a very good reason for it. It is very difficult to find a bear amongst fund managers, just as MSCI World Index approaches a major resistance level.
Chart 5: Disinterest in commodities remains in place
Interestingly, despite high risk appetite and overly-bullish growth expectations (especially in China), fund managers allocation towards commodities remains underweight. Furthermore, the survey also reports that managers remain underweight Energy & Materials as well (two most disliked sectors in couple of last quarters). Merrill Lynch states that:
“The commodity complex is very much the forgotten asset class thus far in 2013.”
I believe there is an above average possibility commodities are now building a basing pattern. Therefore, disinterest in commodities by global fund managers is music to contrarians ears, if you ask me!
Tags: business cycle, China, commodities, equity allocation, fund managers, growth optimism, investors, longer term investors, managers opinions, Merrill Lynch Fund Managers Survey, recession, risk appetite