Is it time to be worried about the market’s current phase?
Judging by the very bullish February survey of big fund managers from Bank of America Merrill Lynch now might be the time to be thinking a little outside the square.
The survey says "Investors are more bullish towards global equities than at any time in the past decade."
Just take that in, more bullish than before the crunch.
Hmmmm. Is that the sound of galloping bulls, or a gang of crazed lemmings racing for the market?
Certainly the outlook is more than a touch bovine.
A net 67% of asset allocators say that they are overweight global equities, the highest reading since the survey began asking this question in April 2001.
And they have fled emerging markets for the joys of developed markets, despite the rotten growth prospects and the enormous rally in developed markets in the past year.
No wonder the rise in the overweight position of global shares represents a significant further increase from January and December when a net 55 % 40% were overweight the asset class, respectively.
At the same time, bond and cash allocations continued to fall.
A net 66% of managers are underweight bonds, up from a net 54% a month ago, while a net 9% are underweight cash – the lowest allocation since January 2002.
The difference between equity overweights and bond underweights has also reached its highest level since the survey began.
And what did Merrill Lynch itself think of the survey outcome?
"The February FMS is one of the most bullish in years. Institutions have record equity and commodity overweights, very low cash levels and the strongest risk appetite since Jan‘06," the firm said this week.
"Surging inflation expectations show we are no longer in a Goldilocks environment and a meaningful tactical correction in risk assets could be caused by a jump in interest rates or weaker US growth.
"The FMS Risk Appetite Index rose to its highest level (47) since Jan‘06. Hedge fund net exposure rose to 39%, highest since July’07.
"Cash balances fell from 3.7% to 3.5%, triggering our FMS cash trading rule equity sell signal."
And there was and an unusual shift in regional allocations accompanies this increase in risk appetite.
Only a net 5% of fund managers are now overweight global emerging markets equities, down from January’s net 43%.
This represents the steepest monthly decline in emerging market exposure in the survey’s history and compares with the net 28% average weighting since this question was introduced.
In contrast, investors now report more positive stances on key developed markets.
Europe is back in favour with appetite for eurozone equities has increased significantly – a net 11% were overweight in February, compared to a net 9% underweight in January.
A net 34% of respondents are overweight US shares, up from a net 27% and 16% in January and December, respectively.
Moreover, the survey shows that the US and eurozone now rank as the two regions investors would most like to overweight going forward.
Yet Bank of America says that a month ago more respondents wanted to underweight eurozone equities (a net 17%) than any other region.
“Unusually, higher risk appetite has been accompanied by a dramatic downsizing in asset allocation to emerging markets, as surging global growth expectations have increased the value attractions of developed market alternatives,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.
“The surge in equity and commodity weightings, uber-low cash levels, rising inflation expectations and crashing EM allocations indicate that we are no longer in a Goldilocks environment.
"A jump in rates or weaker growth are the most likely catalysts for a spring correction,” said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research.
Investors remain confident in the global economy and corporate profits, even though their expectation of a future increase in US interest rates has moved forward.
A net 70% see the Fed lifting rates in the next year, compared to January’s net 62%.
86% of fund managers see short-term interest higher in 12 months’ time. This represents a 19-point rise since December.
An increasing majority expects global inflation to increase this year – a net 75% in February, up from a net 48% in three months ago.
Nonetheless, a net 58% of investors expect the world’s economy to strengthen in 2011, a three-point rise from last month.
A net 68% expect corporate profits rising 10% or more this year – up from 57% and 45% in January and December, respectively.
An important component of inflation, commodity prices, now ranks as the biggest risk that investors identify.
A net 33% rank it ahead of all other threats, up from a net 13% in January.
This is reflected in their more negative outlook for corporate profit margins. A net 2% now say operating margins will fall in the next 12 months, compared to a net 10% who saw this measure improving over the same timescale last month.
At the same time, a growing number of fund managers are seeking to benefit from rising commodity prices. A net 28% are now overweighting the asset class, up from a net 16% a month earlier.
The survey shows that fund managers’ greater risk appetite a
