SMART MONEY CONSENSUS (Negative Consensus/Bull Market Indicator): Fund managers most bearish in two years

October 15, 2014

The latest survey from Bank of America/Merril Lynch reveals that the sentiment of  global money managers is at its lowest point in two years.

"The Bank of America-Merrill Lynch poll for October showed a sharp increase in money managers' risk aversion, with their equity allocation slashed to a 34 percent overweight from 47 percent in September."

That is the lowest in two years and mirrors the darkening economic environment: a net 32 percent of respondents think the world economy will strengthen over the next year, more than 20 percentage points down from September and also a two-year low.

"Concerns over the imminent end of quantitative easing in the U.S. have left investors much less confident in the outlook for the global economy and corporate profitability," BAML said. 

The survey showed a net 18 percent of fund managers, the smallest proportion of respondents since August 2012, think monetary policy is too stimulative. The U.S. Federal Reserve is on course to wind down its bond-buying program this month.

Other notable findings from the survey included:

  • 18 percent of fund managers, the smallest proportion of respondents since August 2012, think monetary policy is too stimulative. The U.S. Federal Reserve is on course to wind down its bond-buying program this month.
  • Fund managers raised their allocation to bonds to a seven-month high, a net underweight position of 53 percent compared with 60 percent underweight in September.
  • Fund managers still prefer equities to bonds but they are rapidly rebalancing. They also raised their cash holdings to 4.9 percent from 4.6 percent.
  • The most "crowded" trade, where fund managers were most heavily positioned the same way, was betting on the dollar to strengthen - 43 percent of them were "long" the U.S. currency.
  • Allocations to U.S. equities rose to a 14-month high and exposure to Japanese stocks a 10-month high as investors shielded themselves from the deteriorating picture in Europe.
  • Euro zone equity exposure reached a 15-month low, a net overweight position of just 4 percent as the economic outlook blackened remarkably. A net 16 percent polled expect the European economy to grow over the next year compared with a net 45 percent last month.

We've referred to the stock market many times in these postings as a game of musical chairs. It appears given the recent indigestion the market has been experiencing that the volume of the music is decreasing. The ingredients have been in place; uber accommodative monetary policy that has created an environment for mis-priced assets, record levels of margin debt. It appears that investors are finally asking whether paper asset prices are justified given tepid economic growth that has been in place globally the past five years. We may be seeing a recalibration of stock prices and usually when that occurs, the baby gets thrown out with the bathwater leaving some well run companies that could potentially be selling for meaningful discounts. It's early days, yet for the first time in a long while, the amount of pessimism may be creating an opportunity to go shopping.