Wednesday, January 30, 2013

ML Fund Managers Survey - Jan 2013

I have recently been quite busy with other matters and I am sure that my lack of presents has been noticed somewhat. However, my focus returns back towards the blog in February, so I will be doing quite a few more posts than I normally have done in recent months. Expect quite a lot of material in coming weeks and months. Today, we start of with a recent update from Merrill Lynch Fund Managers Survey. I will include just some of the more important charts, because it would take too long to go through the whole thing. If you have any questions about other specifics covered in the survey, while not on the blog, just drop a comment and ask - I will be glad to answer it!

Chart 1: Risk taking moves to extremely high levels
Source: Merrill Lynch

Merrill Lynch Fund Managers Survey, which surveyed an overall total of 254 panellists with $754bn AUM, in a period between 4th to 10th January 2013 showed that investors bullishness surged to extremes. The chart abodes shows that risk appetite is the second highest in surveys history. Current readings should be a worry for bulls, and they are just about everywhere these days. On previous two occasions of appetite reaching these extremes, in April 2010 and February 2011, the market eventually suffered a crash (flash crash and US debt downgrade respectively). Merrill Lynch summarises the mood by stating that:
"Investors enter 2013 as bullish as they have been in two years. Growth and risk metrics are at multi-year highs and, most glaringly, investors are OW bank stocks for the first time since 2007."
Chart 2: Managers see no need for market protection
Source: Merrill Lynch

Fund managers remain extremely bullish on the global economic prospects, especially when it comes to China. The survey writes:
"Growth optimism surged to a 33-month high. Optimism on Chinese growth remains robust. A net 63% expect a stronger Chinese economy over the next 12 months, the second highest reading on record."
On the other hand, fund managers are taking “larger-than-normal” risk (shown in the Chart 1), while the number “taking out market protection” fell to the lowest reading since the survey question was introduced. Once again, similar readings were wittiness in April 2010 and February 2011, and eventually markets corrected meaningfully. Bulls better hope that economy and earnings picture really picks up to justify this much greed, otherwise a lot of investors might be in for a disappointment. I hold my doubts.

Chart 3: Business cycle is edging closer toward a recession
Source: Merrill Lynch

Each month, the survey tracks managers opinions on business cycle progression - one of my favourite indicators as a longer term investor. The chart above shows that "a net 65% of investors view the economy as mid to late cycle in maturity. The % of investors that think the economy is currently in recession has retreated back to 6% (from 12% last month)." The economic data continues to hold up for now, but in investing the goal is to anticipate the future, not discuss the present. Majority of investors agree that we are very late in the cycle and therefore near the end of the bull market, which started in March 2009. Therefore, nasty surprises are definitely awaiting us as the secular equity bear market is not yet finished.

Chart 4: Dramatic shift out of cash & bonds, into equities
Source: Merrill Lynch / Short Side Of Long

Equity allocations are also the highest since early parts of 2011. Merrill Lynch writes:
"Bullish expectations on growth, profits and margins have finally translated into higher equity allocations. A net 51% of investors are OW equities, most bullish since February 2011."
At the same time, "allocation to bonds fell to lowest level since May 2011". Furthermore, cash levels fell for "the sixth consecutive month and are now the lowest since April 2011" (last major top in risk assets). The Merrill Lynch Fund Managers Survey title is "The Bears go into hibernation" and there is a very good reason for it. It is very difficult to find a bear amongst fund managers, just as MSCI World Index approaches a major resistance level.

Chart 5: Disinterest in commodities remains in place
Source: Merrill Lynch / Short Side Of Long

Interestingly, despite high risk appetite and overly-bullish growth expectations (especially in China), fund managers allocation towards commodities remains underweight. Furthermore, the survey also reports that managers remain underweight Energy & Materials as well (two most disliked sectors in couple of last quarters). Merrill Lynch states that:
"The commodity complex is very much the forgotten asset class thus far in 2013."
I believe there is an above average possibility commodities are now building a basing pattern. Therefore, disinterest in commodities by global fund managers is music to contrarians ears, if you ask me!

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