It is no secret that commodities have taken a shelling recently, led by oil, which has lost nearly -29% in the past month alone. On a year to date basis, oil is the worst performing commodity, falling -45%. Commodities, as a whole, continue to take a hit, as high risk investments are beginning to lose favor with investors, a stronger US dollar, and deflation symptoms throughout the US and global economy. With that being said, Bank of America Corp (NYSE:BAC) publishes a monthly fund manager sentiment survey called, BofA Merrill Lynch Fund Manager Survey, and an interesting reading found that 36% of fund managers that responded believe that oil in now undervalued following its fall from grace since summer. Despite their feelings of oil being undervalued, 26% of managers say they are cutting their commodity exposure to underweight.
26% of managers are now overweight European equities
However, as investors continue to anticipate a European QE program, we have seen an investment emphasis on cash and European equities. According to Bank of American Corp (NYSE:BAC)’s BofA Merrill Lynch Fund Manager Survey, 63% of its respondents believe that ECB head, Mario Draghi could begin the QE program next quarter, which is up from 41% in the November survey. Furthermore, with 19% of managers viewing European equities as undervalued, 26% have said they are now overweight European equities. Interestingly enough for US and Japanese equities by contrast, are viewed in a bearish light by 10% of managers who said they will continue to remain underweight US and Japanese stocks, due to their perceived overvalued state.
Chilton Capital's REIT Composite was up 6.1% last month, compared to the MSCI U.S. REIT Index, which gained 4.4%. Year to date, Chilton is up 6.3% net and 6.5% gross, compared to the index's 8.8% return. The firm met virtually with almost 40 real estate investment trusts last month and released the highlights of those Read More
I always find manager sentiment surveys to be interesting because it is a forecast of smart money movement. While economic conditions could change, these opinions may change as well, but it is always good to understand the thought process and the methodology behind fund managers and where they see markets heading in the next quarter, year, two years, etc. The BofA Merrill Lynch Manager Survey features 214 “panelists” with a combined assets under management of $604 billion. As you can imagine, these individuals move markets and that is where the phrase “follow the smart money” comes from.
Opportunity in European equities
That being said, the results were interesting for the December survey. Obviously, with oil’s slide, managers are going to be cutting positions and reducing forecasts. On the other hand, fund managers appear to be saying that the opportunity over the next year is in the European equity markets, due to the potential QE program coming next quarter, according to 63% of the managers surveyed. The big takeaway from the December survey from the managers is overweight Europe, underweight US stocks, Japanese stocks, and commodities.
Are valuations the catalyst here?