In last weeks Ira Sohn Conference, Stanley Druckenmiller talked about the end of commodity super cycle and the worsening of slowdown in China. Druckenmiller expected the depreciation in China to result in a chain reaction in its dependent currencies. Almost similar outlook was presented by Michael Hartnett, analyst at Bank of America Merrill-Lynch, in his investment strategy report today.
Negative Growth Expectations In China
Growth expectations in China have turned negative, now at -8 percent, for the first time in 14 months, and the China slowdown coupled with the end of commodity cycle is considered the second most feared tailrisk. This was concluded in BAML’s global fund manager survey, the most feared tailrisk is still the EU crisis, whereas faliure of Japan’s Abenomics is also one of the top five fears among investors.
The survey also found that investors are not bullish enough to bring a decline in risk assets. On a global scale, growth and inflation expectations reduced slightly but the move is not big enough to affect asset allocation. The survey results show that 69 percent of investors see the economy in a mid to late cycle of maturity.
BAML‘s report also points out that bulls on economy are taking an extremely negative stand on commodities, exposure to commodities has fallen to its lowest levels since Dec 2008.
On the other hand, exposure in Japanese equities is climbing up, now for the seventh straight month and is now at a 7-year high. The current allocation at 31 percent is still half of the highest peak of 61 percent that was reached in 2005, which is encouraging.
BAML’s analysis cites cash levels above 4.5 percent as a contrarion buy signal, however the average cash balance is still at 4.3 percent. The cash level is not in accordance with the hedge fund exposure which is touching a multi-year high as of now. High hedge fund exposure has been concluded in other reports issued by BAML as well.
Investor allocation in US has remained unchanged, whereas EM’s saw a reduction in exposure. Japan bulls now outnumber EM bulls by a margin not seen since 2005. In terms of sectors, Pharma and Tech are the most popular among investors. Short favorites are US Banks/Discretionary, Japanese Autos and EU Insurance stocks. The most popular pair trades, are long energy short staples and long Materials short Banks.