There seems to be a few clouds of doubt drifting over global stockmarkets – despite the succession of records on Wall Street, new six year highs for many European markets, and the succession of new highs for our big banks in the past month or so (especially the Commonwealth this week).
European shares are at multi year lows, emerging markets have steadied.
But the tensions in the Ukraine, the slowing Chinese economy and disinflation in Europe continue to burble away in the background, growth forecasts remain solid to encouraging and yet falling bond yields suggest there is more bad news ahead.
There’s just a hint of unease, and more and more big investors are starting to fret about imbalances in the market.
Some of that unease has been triggered by the still rumbling doubts about valuations of key US ‘momentum’ stacks, like Facebook.
The valuations for tech stocks and their biotech cousins remain under pressure.
Those concerns have spread to other markets where tech stocks are in vogue – such as the UK and Japan.
China’s slowing economy continues to trigger concerns, with the country’s sliding real estate sector and especially concern for its possible impact on some of the riskier areas of the country’s huge, unregulated finance sector.
The global rally in bonds hasn’t helped investor nerves – bonds were supposed to be sold off this year with yields rising as economies in Europe, Japan and the US recovered.
That hasn’t happened, as fears about the continuing disinflation and the prospects of deflation gnaw away at investor sentiment in Europe and in the US.
Underlying this rise in bond prices (and fall in yields) is the belief the European Central Bank is about to start some heavy spending to try and fight off the drift to deflation across the eurozone and the rest of Europe.
We will know at the June meeting of the ECB in three weeks, according to most analysts in London and Europe.
The strongest performing markets globally are bonds, especially US Treasuries and their counterparts in Germany (not to mention the huge rally in the bonds of countries like Greece, Spain, Portugal and Italy).
In Australia, the price of Commonwealth Government bonds have rallied strongly – the 10 years have improved 10% – which is far and away better than the 2-3% gains seen in the stockmarket (at best). Yields have fallen from above 4.10% to 3.80% in the past month and a bit here, without any real reason.
Only the price of Commonwealth Bank shares – up 12% plus since the start of the year – comes close among the big cap momentum stocks in this country, to matching the size of the rally in government bonds.
But the CBA’s strength is looking more and more like an outlier, and not a trend.
Given that background, it shouldn’t be too much of a surprise that big investors have suddenly grown more cautious and boosted their cash holdings to two years highs, and that is what was reported in this week’s Bank of America/Merrill Lynch global investor survey for May.
The survey included 218 panelists, with a total of $US587 billion under management. Responses were collected between May 1 and May 8, so it’s current and captured the most recent developments.
The big concerns in April were market and stock valuations, especially in techs, with quite a few investors worried about the preponderance of trading and investing in so-called peripheral bonds (from Portugal, etc).
Cash holdings were high at around 4.8% of portfolios. Now that has risen even further to almost 5% in May, the highest since 2012.
Events in Urkaine, the situation in the South China Sea with China and other countries at loggerheads have helped raise geopolitical risk fears for investors.
So risk taking has been scaled back (that has been a trend for more than a year with the sell off in emerging markets in 2013). But there seems to be a new level of risk aversion, hence the rise in cash holdings.
So despite those recent highs in markets on Wall Street and Europe, big investors are sitting on more cash and have reduced their equity holdings compared with a month ago.
Average cash levels are the highest since June 2012 (when the last big eurozone crisis was at its height).
A net 22% of investors surveyed say they are taking below normal levels of risk, up from 11% a month ago.
And the proportion of asset allocators overweight equities has fallen to a net 37% from a net 45% last month (or from nearly one in two to one in three).
And among those investors, asset allocation has moved into defensive sectors like utilities and energy.
A net 15% of global investors increased their exposure to those industries in May, while a net 14% scaled back their positions in more cyclical banks, and 8% reduced holdings in technology.
The survey revealed that big global investors see two significant risks to market stability.
One-third of the global panel believes the possibility of Chinese debt defaults poses the biggest risk, while 36% say a geopolitical crisis is the greatest threat.
“Investors are showing belief in the economy but with two big question marks: Are we on the brink of a disruptive event? And why, at this point in the cycle, isn’t this recovery stronger?” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
A net 36% of global asset allocators say they are overweight eurozone equities, up from a net 30% last month.
Asset allocations to other developed markets, namely the US and Japan, fell month-on-month.
“Specifically, within Europe, investors are all aboard the periphery train, and there’s now simply no margin for error. Spanish and Italian equities are preferred over those in the UK and Switzerland, while eurozone periphery debt is seen as the most crowded trade globally,” said Obe Ejikeme, European equity and quantitative strategist for Bank of America Merrill Lynch.
Europe is the region most in favour and a net 28% of investors reckon its the region where they want to be overweight in coming months.
That’s up from 23% in April. A net 14% say European equities are undervalued.
And the region least favoured?
The US, with a net 18% of investors saying it is the region they most want to be underweight in, up from a net 9% in April. So the recent weakness on Wall Street can be partly explained from that move.
Interesting the investors are not really upbeat on growth prospects for the next year.
While big global investors still expect to see growth over the coming year, they are questioning the rate of such growth.
Nearly three quarters of those questioned predict “below trend” GDP growth for the global economy over the coming 12 months and 20% say that it is unlikely global corporate profits will grow by 10% or more.
“It appears investors are adjusting for a lower growth environments as [various] indicators have started to soften over recent months,” Mr Ejikeme said in the commentary with the survey.
Perhaps it’s these concerns that are generating the new areas of concern.
But the rise in bond prices are more a signal of sharper falls in economic growth in the coming year, not a slowing to below trend.
Or it’s just yet another development from the unwinding of the Fed’s stimulatory spending, combined with the growing belief the European Central Bank could be about to engage in some major stimulatory move of its own in June or July.
