Fund managers are overwhelmingly bearish on the outlook the markets and prefer cash over low yielding equivalents, that’s the key takeaway from Bank of America Merrill Lynch’s weekly Global Fund Manager Survey.

The survey, which was conducted during the first week of September with 208 panellists managing a combined $579 billion, revealed that the respondents’ average cash level increased to 5.5% in September, at the high end of the 4.2% to 5.8% range which has been in place since the 2013 “taper tantrum”.

When asked why they were running such a high level of cash fund managers responding to the survey overwhelmingly answered that they had: a) “a bearish view on the markets” (42%) b) “preference for cash over low-yielding equivalents” (20%).

Bank of America’s survey also revealed that fund managers had cut equity allocations to flat, which according to historic responses, is one standard deviation below the survey’s norm.

Fund managers are overwhelmingly bearish
Fund managers are overwhelmingly bearish

Fund managers are overwhelmingly bearish

Generally speaking, the respondents had a cautious tone. The state of the survey indicated that most fund managers believe that risk assets are vulnerable to “bond shock.” 83% believe the Bank of Japan & European Central Bank will maintain negative rates next 12 months. Further, 82% admit bond prices in developed markets are “frothy,” while Treasuries are seen as the biggest driver of stock prices next six months. Hedge fund exposure to stocks jumped to highest since May’13 “taper tantrum.” All of these responses were given before Friday and Monday’s bond sell-off.

Elsewhere the 208 fund managers surveyed by Bank of America believe that the most vulnerable longs and most crowded trades are the “NIRP-winners”, a view echoed by many analysts on Wall Street who believe bond-proxy stocks have become extremely overvalued in recent months. In contrast, Japan is the biggest underweight among the fund managers surveyed since December 2012. Big Fund Manager Survey shorts are sterling, UK stocks, and global resources.

Here are some other interesting takeaways from the survey:

  • A record 33% of investors think corporate payout ratios (incl. share buybacks) are too high.
  • 51% of investors want companies to increase capex spending (down from 56% last month).
  • 22% of investors want companies to improve balance sheets (up from 17% last month).
  • 20% of investors want companies to return cash to shareholders (down slightly from 21% last month).
  • Global profit expectations improve to 9-month highs (net 16% expect profits to improve over the next 12 months).
  • Allocation to bonds falls to 8-month lows (net 45% UW from net 43% UW last month).
  • GBP is viewed as the most undervalued on record (tied with Brexit low reading of net 26%).
  • In September, investors rotate out of bond proxies (staples, utilities, telcos) into cyclicals (industrials, discretionary & banks).
  • Allocation to utilities falls to 9-month lows (net 26% UW from net 19% UW last month)