The investors surveyed between October 5 and 11 were cautious on growth, maintained “chunky” cash levels and prefer US domestic demand “growth” plays to “value” plays like Japan and resources, the bank’s poll of 200 fund managers with $561 billion assets under management showed.
“Our equity ‘buy’ signal ends,” the bank’s chief investment strategist Michael Hartnett said.
Expectations of a strengthening of the global economy increased, with a net 20% of fund managers now predicting it compared with 17% last month, but a majority forecast weaker profit growth.
For China, growth expectations fell sharply, with only 5% expecting above-trend growth next year compared with 17% last month. Data for September out of China was better than expected prompting many analysts to say the economy had bottomed out but investors and economists have told Emerging Markets China faces challenges over the longer term.
Cash balances dipped to 4.3% from 4.5% the previous month and a high of 5.3% in June. Bank of America Merrill Lynch’s ‘Cash Rule’ assumes that when cash balances rise above 4.5%, this triggers a contrarian “buy” signal for equities and when they fall below 3.5%, a contrarian “sell” signal is generated. The US fiscal cliff has overtaken the eurozone debt crisis as the top “tail risk” in the survey, with 42% of fund managers naming it versus 27% still believing the eurozone debt crisis to be the number one worry. But only 20% believe the fiscal cliff risk is priced into equities, the survey also showed.
“Our interpretation here is that investors are waiting to see if the cliff has a negative impact on growth, earnings and credit markets before using it as a reason to reduce equity exposure,” Hartnett said.
Exposure to Japan, which faces a slowdown blamed by analysts on the strong yen but also on the country’s tense relationship with China following the dispute on the sovereignty of islands, is the lowest since the third quarter of 2009.
Around 72% of the fund managers surveyed said they believed the yen was overvalued, 53% think the euro is overvalued with just 16% believing the US dollar to be overvalued.
The big overweight sectors are discretionary goods, real estate, staples and pharmaceuticals, as well as US stocks, while the big underweight sectors for October are energy, materials and Japanese stocks.