Fund managers have yet to reach the point of “maximum bearishness” despite the flight from risk assets seen in 2016, according to a study that has underlined investors’ conflicting views on the sell-off.
Investment Adviser reported last week that the usual ‘buy the dip’ strategy was notable by its absence during this year’s equity slump. But while investors may be reticent to re-enter the market, a further week of falls has led some to question the catalysts for these drops.
Bank of America Merrill Lynch’s (BoAML) global fund manager survey, conducted between January 8 and 14, emphasised the puzzle. It found investors remain overweight equities and “stubbornly” long 2015 favourites such as technology, eurozone and Japanese stocks – the assets most vulnerable to what the investment bank calls a “redemption/recession shakedown”.
But the survey of 173 managers also found the average cash level within portfolios was 5.4 per cent, the third-highest since 2009, and that a rotation into defensive areas of the market was underway.
BoAML chief investment strategist Michael Hartnett said investors were “yet to accept [we] are already well into a normal, cyclical/recession/bear market”.
Others are not convinced by the bank’s bearish stance. Independent forecasters such as Capital Economics have suggested markets are “overreacting”, with fundamentals relatively sound and $27 oil a slightly misleading indicator of global growth prospects.
Aberdeen Asset Management chief economist Lucy O’Carroll took a similar view, but was wary of a weaker oil price and falling renminbi creating a vicious circle.
She said: “We do not believe that the macro fundamentals are as bad as recent market moves suggest. If markets regain some faith in these fundamentals, the current situation could be another August 2015-style hiccup. The longer it takes to achieve stabilisation, the greater the self-fulfilling prophecy risks.”
Columbia Threadneedle CIO Mark Burgess, meanwhile, hinted that different fundamentals may be reasserting themselves. “The era of asset price reflation… is over and we cannot rely on our returns being flattered by QE or other valuation recovery dynamics,” he said last week.
Opinion on the potential catalyst for a change is also divided. BoAML’s Mr Hartnett said only an improvement in the four ‘Cs’ – China, commodities, the consumer, and credit markets – would inspire optimism.
Those seeking reassurance that things are not so bad cite more specific metrics. Philip Saunders, co-head of multi-asset at Investec, noted that the Chinese property market – once viewed as a barometer for macroeconomic stress – has been performing relatively well since China’s stockmarkets began to sell off last spring.
He said: “Hong Kong-listed property stocks have been outperforming since May. [There may be weakness] in the third and fourth-tier cities, but prices in the first and second-tier cities have been going up this year.
“Concerns about China falling apart are profoundly overdone.”
