Institutional investors are buying European and emerging market stocks while selling US equities and holding back some cash, that’s according to Bank of America Merrill Lynch’s latest Global Fund Manager Survey.

The survey, which polled 203 panelists with $593 billion of assets under management between April 6 and April 12 appears to show a cautious mood among institutional investors. The average cash balance and among respondents rose to 4.9% during April from 4.8% in the month before, which is itself significantly above the 10-year average of 4.5%. Such a high cash weighting at a market peak is, according to BOA’s chief investment strategist Michael Hartnett, a contrarian buy signal for equities.


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It would appear institutional investors are not following Hartnett’s advice. The average allocation to US equities plunged to a 20% underweight from a net 1% overweight last month, the lowest since January 2008. The current allocation to US equities is 0.8 standard deviation below its long-term average. In contrast, allocation to Eurozone equities has jumped to a 15-month high of 48% net overweight from the net 27% overweight last month. The current allocation is 1.3 standard deviation above its long term average that’s despite uncertainty surrounding the French election. Furthermore, the survey’s respondents believe the Eurostoxx could fall by 5% to 10% if Le Pen wins. Positioning dictates most investors don’t see this scenario unfolding.

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As well as rotating into European equities, institutional investors surveyed by BOA were buying emerging market equities heavily during March. The allocation to emerging market equities jumped to net 44% overweight from net 18% underweight last month, the highest allocation in five years and 1.1 standard deviation above its long term average. When asked if they thought equity markets are overvalued, 32% of respondents responded that they believe they are, a near 17 year high. In fact, the last time when investors’ believed this to be the case was back in 2000. But not all equity markets are created equal and while a third of respondents believe equities are generally overvalued, only a net 47% of investors think emerging market equities remain undervalued, and a net 19% think European equities are undervalued.

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The overall allocation to equities of the 203 panelists surveyed declined lower to 40% net overweight for April, 0.5 standard deviation above its long term average. The overall allocation to bonds increased to net 62% underweight from net 65% underweight last month. The current overall allocation to bonds among institutional investors is one standard deviation below its long term average. Lastly, allocations to commodities declined to net 4% percent underweight from net 1% overweight last month. The current allocation is at its long term average level.