While US investors seem to be bullish on the outlook for equities, it seems European equity managers are more cautious on the outlook for stocks in the year ahead.
Earlier this week, Bank of America issued its weekly client flow trends report, which showed that private clients purchased a net $1.3 billion of stocks last week with ETF net buys surging to the highest level since January and hitting the third highest level in BoA’s data set. This buying means that private clients have acquired a net $7.9 billion of equities including ETFs year-to-date, the highest level of buying since 2008.
However, European equity investors seem to be more skeptical about the current market rally. According to BoA's latest European Fund Manager Survey, most respondents expect markets to peak in H1 with a Fed/ECB policy mistake the most cited tail risk followed by bond market crash and Chinese debt crisis.
European equity managers are selling
According to the survey, after three to six months, in which risk appetite metrics generally increased, the December survey shows a moderation in such indicators with cash allocations increasing and modest declines in equity weightings as well as exposure to risk.
In fact, European equity managers are so cautious that cash balances rose for the first time in four months and moved back above 10-year averages. That being said, while the average European cash allocation moved back up to 4%, this is still below the global average cash allocation of 4.7%.
"In terms of asset allocation, December saw a mild decrease in equities (net 48% overweight from 49%). Bonds also slightly diminished (-56% to -59%). Equities remain the asset class that is overweight by most investors even though they are considered expensive (a net 45% saying equities are overvalued). However, the balance overweight equities is not at historical extremes (current month is 78th percentile of the range since 2001)."
A Fed / ECB policy mistake dominates the minds of European equity managers. With the Fed's balance sheet run off set to hit more than $400 billion next year, managers seem to be concerned that a lack of central bank intervention will destabilize markets. 23% of respondents believe that this is the biggest risk to markets with the second biggest perceived threats being a Chinese debt crisis, “market structure” and conflict with North Korea are also cited as tail risks.
Meanwhile, managers are selling the UK but buying the US thanks to bitcoin and FAANG:
"The UK continues to be deeply out of consensus, falling once more to a new record low since 2001 (net 39% of respondents saying it is the region they would most like to underweight). Meanwhile sentiment on the US thawed – the balance preferring US has improved from a low of -40% in June to -19% this month. Long Bitcoin and long FAANG/ BAT stocks are viewed as the most crowded trades."