Higher cash portfolio levels trigger equities buy signal

Average cash balances in investors’ portfolios have risen above a critical 4.5 per cent mark in the latest Bank of America Merrill Lynch fund manager survey, which it suggests makes equities a buy.

The latest survey, which questioned 222 panellists with $599bn (£373.7bn) in assets under management, reported that in spite of all-time highs in US equities, there remained “investor mistrust” about valuations and economic growth, meaning cash balances remained “very high”.

According to the latest figures, cash is at 4.6 per cent in investors’ portfolios – above the 4.5 per cent level that the survey suggests is an indicator to buy equities.

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“The fund manager survey cash rule uses the rule that when the average cash balance rises above 4.5 per cent, a contrarian buy signal is generated for equities,” stated the survey.

“When the cash balance falls below 3.5 per cent, a contrarian sell signal is generated.”

The survey reported that cash seemed to be the main hedge against a potential fall in markets, with a net 51 per cent of investors stating they had not used derivatives to protect against a market slump.

Investors’ bearishness was further signified by the fact that only 17 per cent of investors forecasted “above-trend” growth in 2014.

The survey stated that 31 per cent believed the lack of bank lending in the G7 would hold the global economy back from “escape velocity”, while 26 per cent reported that the slowing growth in China would keep the global economy from realising strong growth.

A total of 30 per cent stated that they were most worried about a China ‘hard landing’ – a sharp slowdown in economic growth – up from 20 per cent in October’s survey.

This concern has replaced US fiscal tightening as the most prominent investor worry. Only 21 per cent thought the Federal Reserve would start to taper its asset purchases before March.

Elsewhere, just 3 per cent of those surveyed thought emerging market equities would match or exceed their 16 per cent annualised return produced during the past decade.

One reason for this, the survey reported, was the weakness in the dollar, which reached its “cheapest since June 2008” and was considered a “factor that keeps emerging market equity weightings and expected returns historically low”.

In terms of sectors, investors pared back their underweight to commodities to net 24 per cent underweight from 28 per cent underweight in October.

Within equities, appetite for Japanese stocks waned slightly with investors in the survey 24 per cent overweight – down from the five-month high of net 30 per cent overweight.

The overweight to European equities dipped to net 42 per cent from 46 per cent in October, while exposure to UK equities rose to the highest level in 11 years to a net 12 per cent overweight.