After Thursday’s massive sell-off in Europe and the US you can hardly blame investors of all sizes for heading for safety.
European markets saw falls of 5% and more than 6% (In Italy), US markets fell by around 4% and US bond yields fell to record lows, with the 10 year yield falling under 2% at one stage for the first time ever.
Oil fell 6%, copper dropped, the Australian dollar shed 2c to around $US1.0350.
That was echoed in Europe where UK and German bond yields hit record lows never seen before.
There’s a flood of cash looking for safe, liquid homes in Europe and the US.
If anything the selling wave and uncertainty greater than the week before, especially with questions being asked about the funding abilities of big European banks.
So with all the uncertainty, where’s the big money going?
Well, the August survey conducted for Bank of America/Merrill Lynch is naturally quite gloomy, being conducted from August 5 to 12.
In that week, as global markets seesawed, the US lost its AAA credit rating from Standard & Poor’s and France, Spain and Italy loomed as major problems for a wobbling eurozone.
World sharemarkets fell by more than 12% during the survey, and while they recovered some of that lost ground since, sentiment remains fragile and very uncertain, as we saw overnight Thursday.
So Europe and the US, especially shares, are on the nose, gold is overvalued, and according to quite a few managers; China is seen in a positive light, as are other emerging markets.
And, given the volatility, big fund managers are holding more cash than they have since the GFC in 2008 -09.
The firm’s latest monthly study surveyed 244 fund managers overseeing $US718 billion and revealed that a net 13% of managers believe the global economy will experience weaker growth compared with a net 19% in July who were confident the economy would improve.
But these big investors also reckon the world economy will avoid a dip back into recession: a net 42% believe a global recession is unlikely in the coming year.
The reading represents a significant swing since July when a net 19% of managers were confident the economy would improve.
And investors are very worried about corporate profits, seeing the biggest downwards swing in the survey’s history.
A net 30% of the panel expects the profit outlook to deteriorate in the coming 12 months. In July, a net 11% saw an improvement in profits.
As always, cash holdings are a very important indicator for fund managers, especially during times of rising stress.
The August survey shows big fund managers’ holdings of cash have soared to their highest levels since the depths of the credit crisis as investors have moved out of equities, notably cyclical stocks.
Cash balances have climbed close to their high of 5.5% in December 2008.
Global investors hold an average of 5.2% of their portfolios in cash, up from 4.1% in July.
A net 30% are overweight cash compared with their benchmark. Both numbers are at their highest level since March 2009.
As a result of the uncertainty and rush to cash up, asset allocators have scaled back equity positions faster than in any previous month in the survey’s history.
A net 2% remain overweight equities, down from a net 35% last in month’s survey.
Asset allocators have also reduced their underweight positions in bonds and reduced holdings in commodities and alternative investments.
“Flows out of equities into cash have reached capitulation levels, especially in the US, but it’s significant that a revival in optimism towards China has survived the global correction,” said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research.
“Investors are waiting for convincing, coordinated action from governments before recommitting their cash to equities,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.
Asset allocators have reduced their positions in the US more aggressively than in any other region and at the sharpest rate the survey has ever recorded.
Asset allocators surveyed are now slightly underweight US equities with a net 1% underweight this month, compared with a net 23% overweight in July.
At the same time, US fund managers have demonstrated a U-turn in economic sentiment. A net 14% of the US fund managers in the survey panel believes their economy will weaken, in contrast to the net 29% predicting a stronger economy in June.
Surprisingly, the eurozone is the one region to have avoided the global equities sell-off because they were already underweight the area’s shares.
But while they remain underweight eurozone equities, the net percentage underweight the region has fallen to 15% this month from 21% in July.
But within Europe, it’s a different, far gloomier story with a net 7% of the regional panel of fund managers expecting the European economy to weaken, up starkly from a net 22% in July; although, a solid majority still think Europe won’t fall into a recession.
This week’s poor growth figures for the eurozone, especially Germany (0.1% for the second quarter, down from 1.3% in the March three months) was a worrying development that many ignored at government level.
Good news for Australia from the survey, fund m
