It’s not just the International Monetary Fund which has grown more cautious in the wake of the uncertainty caused by the Brexit vote in the UK nearly a month ago (which this week caused it to trim its 2016 and 2017 global economic growth forecasts by 0.1%).
Some of the world’s biggest fund managers are in a similar frame of mind, despite the post-Brexit market rally which staggered onwards and upwards overnight.
The S&P 500 index has jumped nearly 9% since the lows hit in the days after Britain’s vote to leave the European Union on June 23 (the flight to safety which saw bond yields hit record lows in the US, UK, Japan, Europe and Australia) has eased and deals and bids in their billions have started reappearing as investors and their advisors grow more confident.
But that hasn’t assuaged global investors. Cash levels are now at 5.8% of portfolios, up from June and at their highest levels since November 2001, according to the latest Bank of America Merrill Lynch Fund Manager Survey for July which was issued on Tuesday night.
And adding to the level of insecurity, investors also are looking for protection, with equity hedging at its highest level in the survey’s history.
To underline the fear level among these big investors consider that the tens of billions of dollars in cash these big managers are holding is being parked where they will receive low returns, or nothing, almost nothing, or have to pay to invest the money because of negative interest rates.
Market watchers point out that adding to the high fear levels among these big global fund managers (but unnamed in the survey) that Bank of America Merrill Lynch talk to, is the realisation that there are few safe havens left – there’s around $US12 trillion of negative yielding debt around the world – especially in Japan, the EU and Scandinavia.
And with the US Fed’s interest rate stance is uncertain until at least the two-day meeting next week, there are few safe bolt holes around at the moment, and even then the Fed won’t raise rates until late this year or early 2017, or so many investors think.
In fact, fear is running so high that BofAML senior managers reckon it has helped feed the post Brexit rebound to some degree.
“Record numbers of investors saying fiscal policy is too restrictive and the first underweighting of equities in four years suggest that fiscal easing could be a tactical catalyst for risk assets going forward,” Michael Hartnett, chief investment strategist, said in commentary on the survey.
The survey showed that those managers game enough to take positions moved from the eurozone, banks and insurance companies to the US and industrials, energy, technology and materials stocks.
They did so ahead of the start of the second quarter earnings season. In fact global investors are now net overweight US shares for the first time in 17 months.
The one place where risk has risen is in emerging market equities, with allocations hitting 22-month highs. European stocks went to underweight for the first time in three years, while Japanese equities hit their lowest weighting in 3½ years. Cash levels on investor balance sheets have been creeping up for all of 2016, according to the survey’s figures. July’s survey showed that for the first time in three years that investors’ average allocation to equities has dropped to underweight.
It’s also the first time in three years that allocations to European equities have moved to underweight.
In June’s survey, 30% of respondents identified Britain leaving the European Union as by far the biggest ‘tail risk’ for world markets.
That transpired on June 23 and in this month’s poll fund managers voted with their mice, cutting their UK equity allocation to a net 27% underweight from a net 23% in June.
And the proportion of investors looking to short UK equities, meanwhile, hit its highest level since December 2009 (understandable given the Brexit vote, although those who had chosen to short Arm Holdings must be ruing that they did after being caught by this week’s massive 43% premium in the bid from Softbank of Japan.
Asked what they perceive to be the biggest “tail-risk” for global markets at the moment, the most popular response among the 195 panelists–who were questioned between July 8 and July 14–was geopolitical risk.
