Did the November Bank of America-Merrill Lynch (BoA-ML) survey of global fund managers provide us with another example of a contrarian indicator?
Being a contrarian means taking an opposition to one that’s generally accepted. So when risk levels get too high and cash with fund managers too low, it’s usually time to sell.
And when cash levels are high and investors gloomy, it could be a good time to buy.
The other intriguing point about the survey for November is that it came from a survey that started on November 5 and ended ion November 11, which saw gold hit new highs, copper as well, some markets hit two years high, and oil a 25 month high, with strong activity in other commodities.
It missed by a day the sell-off on Chinese inflation fears and the rising level of concern about Ireland and the eurozone that saw a big sell-off, especially commodities on Friday, November 12, which continued on Tuesday around the world.
On the whole the results for the survey were solid and upbeat, but there was a small, but noticeable tinge of concern.
Overall fund managers were at their most bullish since April up to last Thursday, according to the survey.
They seemed to have been heavily influenced by the Fed’s second round of monetary easing earlier this month.
But the November Bank of America Merrill Lynch Fund Managers Survey cautioned that the positive tone in a market already larded with recent gains and a growing perception of risk carries the seeds of contrarian bearishness.
"At the very least we could see a balancing out of defensive vs. cyclical buying but the risk of a market correction now looks high," the report concluded.
“Following QE2, we have witnessed a capitulation into risk assets to a degree that history suggests should prompt concern.
"Cash holdings, especially, are dangerously low at 3.5 percent of portfolios,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.
“It’s possible that the year-end rally has already happened, leaving investors vulnerable to event risk such as a deepening European sovereign debt crisis or a dollar rally,” said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research (that looks like it was a spot on comment).
For contrarians the sells from the survey are commodities, emerging-market equities, global tech and materials, and the buys are cash, Japanese equities, global banks and utilities.
And that’s seems to be what sort of happened from last Friday onwards, with the Chinese market hammered, along with commodities like gold, copper and sugar.
According to the survey, 35% of the managers polled predicted accelerating global growth in 2011, up from 15% in the previous survey in October (which was after the strong performance in September).
The survey said a net 41% expect corporate profits rising by 10% in the next year.
Expectations that inflation would rise rose to 48% from 27% in the last survey. That will make the US Fed happy.
But US producer and consumer prices released this week show no sign of inflation at all
.
In fact deflation has reared its ugly head in the CPI with the annual rate to October for core prices now 0.6%, the lowest since 1957.
But the reality is that inflation won’t rise until the general level of economic activity in the US and Europe approaches normalcy, meaning stronger consumption and consumer spending is needed over the next year or more.
And 45% of the respondents thought monetary policy is too loose, marking the largest number of managers taking the position that global interest rates are too low since a survey in 2004.
But then they had little to say on what the alternative could be, especially in the US.
"There was an intriguing decline in Chinese growth expectations while the biggest consensus ‘tail risk’ is a European sovereign-debt default," the report said.
The report said asset-allocation managers have depleted cash reserves and are now suggesting a rare negative weighting in cash, while the average cash holding of the managers surveyed was just 3.5%.
Could this be a contrarian tactical sell signal for shares?
It was from last Friday onwards.
The survey’s risk-appetite index rose to 45, the highest level since April, and with fewer than one in five investors believing a Fed rate hike is coming this year (those who think the Fed will hike rates were obviously on another planet during the survey).
With that confidence, investors raised equities up to net 41% overweight from 27% in October, while the percentage of fund managers recommending an overweight position in emerging markets rose to a near-record 56%.
But Japan remains the most unloved equity region.
Tech and energy were the most popular global sectors, but investors aggressively bought materials during the poll period, raising that sector to 21% from 9% previously.
They sold off consumer, pharmaceutical and industrial stocks, while banks were the largest underweight among global investors
Allocations to global emerging market equities (GEM) have continued to rise and this month reached their highest level in nearly seven years. A net 56% of the panel is overweight GEM, up from a net 32% two months ago.
Commodities have also grown in popularity with a net 21% of asset allocators overweight the asset class, compared with 17% a month ago.
Investors have also increased their equity allocation to Basic Materials stocks with a net 21% overweight in the sector, up from a ne
