Looking for a rally Global fund managers' "unambiguous pessimism" suggests a contrarian rally may be on the cards.
So says Merrill Lynch, whose latest monthly fund manager survey (conducted before last Thursday’s Federal Reserve decision to keep rates on hold) shows commodity allocations have hit seven-year lows; stock allocations have seen their biggest monthly drop since the panic of August 2011, bringing equity allocations to their lowest level since 2012; hedge fund asset exposure is at a three-year low; cash levels are at a seven-year high.
It all indicates risk assets are “riper for a rally”. Some caveats: investors remain overweight riskier sectors such as technology and financials, and underweight defensive sectors, indicating a “further run to safety in the coming months” is possible.
Secondly, contrarians will not be tempted by Europe, where allocations remain well above average.
Finally, whatever about a short-term bounce, the Tina trade – There Is No Alternative to stocks – seems to be in trouble. Cash levels have been very high for three months now while equity allocations have (finally) plunged below their long-term average.
A low-yielding world has meant stocks have been seen as a no-brainer for years; investors are now questioning that assumption.
Emerging markets' record low Contrarians with strong stomachs might be tempted by emerging markets (EM), which Merrill found are now being underweighted by a record number of fund managers. Fund managers have been wary for some time, and they've been right – EM indices have lost almost a quarter of their value this year. The current reading is extreme, however.
The last time allocations were even close to current levels was in early 2014, prior to a strong six-month period of outperformance. EM are now “fairly cheap on an absolute basis and very cheap relative to developed market equities”, says Blackrock, which cautions that selectivity is key – there are huge differences among EM countries. GMO, the influential investment giant headed by Jeremy Grantham, reckons EM indices are now the only ones positioned to deliver strong equity returns over the next seven years.
Allianz’s Mohamed El-Erian last week described the current situation as “one of these things that happens once a decade”. A word of caution though: many “stuck” EM investors are “looking to get out”, so “even more attractive positions” should follow.
“Be careful,” says El-Erian, “because it’s going to be incredibly volatile in the next few months.”
Don't buy stocks in morning When do you place your order for a stock? Are you a first-thing-in-the-morning kind of person? You'd be better off waiting, the Wall Street Journal reported last week. The gap between bid and ask prices is greatest at the morning bell, averaging almost 1 percentage point in the first half of 2015.
Within 15 minutes of trading, the spread shrinks to just 0.08 per cent, and to less than 0.03 per cent at the market close. StockTake recently came across a separate study that found many stocks display "positive overnight biases". A trading strategy based on buying at the close and selling the next morning would have produced annualised returns of 21 per cent after trading costs. Deep pockets are needed to take advantage of the latter strategy, but the message seems clear: leave the morning trading to the dumb money. Stalinism in the US? No one does hyperbole quite like a Wall Street billionaire.
In 2010, Blackstone founder Steve Schwarzman said the US administration’s proposed tax increases amounted to a “war”, “like when Hitler invaded Poland in 1939”.
Last year, venture capitalist Tom Perkins compared the “demonisation” of the rich to Hitler’s war on the Jews in the 1930s, while Home Depot co-founder Ken Langone agreed populist criticisms resembled “what Hitler was saying in Germany” in 1933.
Last week, hedge fund billionaire Bill got in on the act. The largest shareholder in Fannie Mae and Freddie Mac, Ackman is upset about the US government’s attempts to keep all the profits generated by the mortgage lenders. If allowed, “then we are in a Stalinist state and no private property is safe – and take your money out of every financial institution, put it into gold or Bitcoin and just get the hell out because we’re done, maybe the clothes on your back, but other than that nothing is safe.”
Well, at least he didn’t mention Hitler.
