We live in uncertain times and it seems that Wall Street is extremely concerned about the outlook for financial assets. In fact, the Street appears to be so concerned about acid volatility and asset prices many asset managers are seeking safety in what is now being called the “safe space.”
This “safe space” is a central bank creation. According to the findings of Bank of America Merrill Lynch’s most recent Fund Manager Survey, which quizzed 211 panelists with $628 billion of assets under management in the period 5th to 11th Aug 2016, most asset managers believe central banks will keep rates lower for longer and this belief is behind the “safe space” theme.
Assets are flooding into sectors and assets that are usually perceived to be safe havens. The BoA survey shows that the most crowded trades among the respondents are 1) long high-quality stocks, 2) long US/EU Corporate bonds, 3) long gold. Also, it seems that managers are long REITs, Pharma & Tech and US quality while being short Financials, UK/Eurozone stocks and Resources.
Here are some more key takeaway is from the survey.
Funds flock to central bank “safe space”
Cash levels among the investors surveyed have dropped sharply from a 15 year high of 5.8% last month, to the 5.4% of the beginning of August. According to BoA’s analysis, there would need to be another sharp drop in cash allocations to 5.1% to signal an end of the rally.
Cash allocations are dropping because it seems that institutional investors are becoming more optimistic about the outlook for global economic growth. Growth expectations rebounded from last month’s slump and now a net 23% of investors expect the global economy to improve over the next 12 months. This is hardly the most optimistic sign that certainly an improvement. 61% of investors say that the global economy is in the late-cycle phase — an eight-year high.
Twenty-five percent of the respondents to BoA’s survey believe that Treasury bond yields are the biggest driver of equity prices over the next six months.
Geopolitics and protectionist policy are seen as the largest risks to financial market stability.
Real estate is currently the asset class of choice for most institutional investors.
But despite the fact that real estate exposure is at its highest level since 2007, the vast majority of respondents to the BoA survey don’t believe it is the most overcrowded asset class.
Indeed, 34% of the respondents believe that “Long High Quality stocks” is now the most crowded trade.