Investors Boosting Cash To High Levels As China Worries Mount: BAML

Investors Boosting Cash To High Levels As China Worries Mount: BAML

Investors all across the globe have been focusing on China’s volatile stock markets for the last few months. Until the last few weeks, they had been marveling at the amazing bull run in Chinese stocks, but after the close to 40% correction that began in late June, they are now watching warily to see if the other shoe is going to drop. Of course, as most readers here would note – why did they note raise the cash before any crash and instead react to the drop as an opportunity to find potential value? Human nature is the answer

Of note, the survey was conducted by Bank of America Merrill Lynch Global Research with assistance from market research company TNS. A total of 191 panelists with US $510 billion AUM participated in the survey taken earlier this month. A total of 149 managers, managing US $399 billion, were in the global survey, and 90 managers, managing US $196 billion, were participants in the regional surveys.

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China number one concern among fund managers in BoAML survey

The July BoAML fund manager survey highlighted that global investors have notably increased the cash allocations in their portfolios related to worries about a weaker global economy, especially in China. The survey noted, however, that equity allocations were not impacted by this higher risk aversion.

Highlights of the survey include:

  • Confidence in the global economy drops off a cliff, from 55% of investors expecting strengthening a month ago to just 42% today.
  • China is the number one worry with 62% of respondents anticipating the economy will weaken over the net year; in fact, 80% believe Chinese GDP will drop under 6% by 2018.
  • Cash levels zoom up to the highest level since 2008 at 5.5% of portfolios, and gold was perceived as undervalued for first time since 2010.
  • Pessimism on China resulted in weakness in assets related to China. The report noted that commodity allocations hit a six-month low, and Global Emerging Market equities allocations continued to drop as they reached a 16-month low.
  • In general, bonds are seen as “much more overvalued than equities and more at risk of volatility-driven crash”; fund mangers with equity overweights increased to net 42%..
  • U.S. dollar bullishness also increased, despite the consensus of no U.S. rate rise until the fourth quarter of 2015 or later.
  • Overweights on European stocks are also up, although the report highlights that a “potential eurozone breakdown is now the biggest ‘tail risk.'”

Statement from BoAML execs

“Rising risk aversion and stretched cash levels provide a contrarian buy signal for risk assets in Q3,” commented Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.

“Despite the Greek newsflow, intention to own European assets is high and rising, though global growth remains vitally important for European stocks,” noted  Manish Kabra, European equity strategist.

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  1. Benjamin Graham – also known as The Dean of Wall Street – was a scholar and financial analyst who mentored legendary investors such as Warren Buffett, William J. Ruane, Irving Kahn and Walter J. Schloss.

    Warren Buffett wrote the preface for Graham’s book – The Intelligent Investor – in which he calls it “by far the best book about investing ever written.”

    Graham’s first recommended strategy – for novice investors – was to invest in Index stocks.
    For more serious investors, Graham recommended three different categories of stocks – Defensive, Enterprising and NCAV – and 17 qualitative and quantitative rules for identifying them.
    For professional investors, Graham described various special situations or “workouts”.

    Warren Buffett once gave a speech at Columbia Business School explaining how Graham’s record of creating exceptional investors (such as Buffett himself) is unquestionable, and how Graham’s principles are everlasting. The speech is now known as “The Superinvestors of Graham-and-Doddsville”.

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