Investors are fleeing US equities, spooked by the strength of the dollar and weak economic data, according to Bank of America Merrill Lynch (Baml).
The latest Baml fund manager survey in May found the proportion of respondents with an underweight position towards US equities had reached its highest level since January 2008 at 19 per cent, up from 12 per cent in April.
Following several years in which more investors had an overweight US equity position than underweight, there has been a sharp turnaround in investor sentiment.
While the S&P 500 index recently hit another record high, US equities have underperformed the global market and have significantly lagged returns from European and Japanese equities so far this year.
Given investors’ relative positioning, with large numbers holding overweight positions in Europe and Japan, Baml said: “Contrarians would go long US equities relative to the broader market.”
The growing negative sentiment towards the US has been mirrored across the survey by a huge jump in investors’ cash levels and the lowest allocations to equities in the past six months.
A net 21 per cent of respondents said they had an overweight position to cash in their portfolios in May, a huge jump from 3 per cent in the April survey and the highest cash allocation for seven months.
Within regional and sector equity allocations, there were growing signs of a leaning towards contrarian trades, with the exception of the US.
Investors began to buy into emerging markets, reducing the large net underweight position towards the region, which has struggled compared with global equities for several years.
Respondents to the Baml survey had a net underweight position towards emerging markets of 6 percentage points in May, compared with a net underweight of 18 per cent in April.
Investors have also begun to flock back into global energy stocks, following the sell-off in the sector that had mirrored the collapse in the price of oil in late 2014 and early 2015.
Global allocations to energy stocks hit a record low in Baml’s April study, with 27 per cent of respondents saying they had an underweight position.
But this negative sentiment reversed suddenly in May, with just 8 per cent of those surveyed now with an underweight position in the sector.
Baml said this shift was the biggest one-month surge in energy stock positioning since June 2007.
There was a corresponding flight away from global discretionary stocks, which have been one of the most consensus overweight trades in the past year.
The percentage of respondents with a net overweight position towards the sector fell to 31 per cent in May from a record 45 per cent in April, the first decline in the number of investors buying into the sector for nine months.
However, not all consensus trades have run out of steam, with the Baml survey highlighting that investors continued to pile into technology stocks and out of the materials sector.
Investors set to profit from higher global growth and strong dollar
In spite of the allocation switches seen in the past month, Bank of America Merrill Lynch says investors are still largely positioned to benefit structurally from “higher global growth, higher rates and a stronger [dollar]”.
This positioning includes investors going overweight Japan and Europe, which will benefit both from better growth and weaker currencies as the dollar strengthens.
It has also led investors into both cyclical and bank stocks – cyclicals to benefit from higher growth and banks to profit from higher interest rates.
And while the percentage of investors with a net overweight position in equities – which should also benefit from higher growth – fell to a six-month low in May, the figure of 47 per cent still makes it vastly more popular than any other asset class.
