The Merrill Lynch fund manager survey for July is out and it shows that the big investment bank’s have been successful in persuading their clients to rotate into more defensive stocks:
Having been fleetingly underweight all the big defensive sectors, investors have started reversing their stance. A net 11 percent of respondents are now overweight pharmaceuticals, a traditional safe-haven, compared to a net 2 percent underweight the sector in June. Exposure to staples and telecoms also rose. The percentage of investors overweight Materials, a highly cyclical sector, fell to a net 1 percent from a net 15 percent in June. World equity markets fell by 4.9 percent from July 2-9 when this survey was completed.
Oddly, money managers remain bullish on the global economy:
Confidence in the global economy remains strong, however. A net 79 percent of the panel believes global growth will improve in the next 12 months, up from 78 percent in June.
But this is not as strange as it first seems:
Amid reduced risk taking, investors are increasing, rather than scaling back, their allocations to emerging markets, at the expense of investment in Europe and the U.S. Decoupling is having a sequel. Investors are very overweight emerging market equities while at the same time underweight every other equity region.
In the case of Europe, very underweight.
Investors have become more negative about equities in both the eurozone and the U.S.
A net 30 percent of the panel would most like to underweight the eurozone — the worst reading on the region since 2001. A net 9 percent would most like to underweight U.S. equities, compared with a net 3 percent wanting to overweight the U.S. in June. Investors are overriding the perceived lack of value on offer in emerging markets to remain bullish towards the region. A net 8 percent of global respondents view emerging markets as overvalued. Equities broadly are seen as undervalued by 8 percent of the paneSo there you have it, decoupling lives. We wonder what Albert Edwards and all those other China bears think of that.
FWIW, Merrill reckons all the defensive/cyclical churning has presented an interesting investment opportunity.
Having fleetingly been U/W all big 4 defensive sectors last month, investors turned on a sixpence in July with telecom, pharma and staples all recovering strongly, at the expense of materials, energy and industrials.
The degree of optimism on EM vs. Eurozone looks dangerously extreme and, more broadly, the retreat to the defensive positioning of February, in our view, provides another opportunity to reload on cyclical over defensives trades on the expectation of confirmation of real economic growth emerging across all regions from Q3.
So, stand by for a sequel to March’s dash for trash.
Related links:
Bulls vs Bears – FT Alphaville