Fund managers remain cautious across the board even though most of the market has pulled back by a little over 10% from its peak, and it doesn’t look like that will change anytime soon. Further, most fund managers remain overweight on financials, cash and offshore assets, according to Bank of America Merrill Lynch analysts John Morris and Nadeem Dawood.
They put out the latest edition of their Fund Manager Survey this week.
Hedge fund positioning
The analysts said according to the numbers, 80% of fund managers believe the market is currently overvalued. That’s unchanged from their last reading, although they noticed “subtle” changes in other areas.
For example, they report that on a 12-month basis, fewer fund managers are bearish on equities. Also only 60% of managers only see Sell opportunities right now, compared to 100% of the respondents in their May survey.
Further, domestic cash levels increased to 15%, which is only 3 points off BAML’s survey highs.
In the near term, BAML reports that investors are adding to resources, but in the long term, they’re more bearish on commodities.
Interest rate hike expected in Q4
Investors have been concerned about the macro environment for some time, and fund managers increasingly see it worsening.
BAML found that net 30% of managers (compared to 17% last month) expect the economy to weaken, while net 60% (compared to 42% last month) believe inflation will rise.
There has been much debate about when the U.S. Federal Reserve will hike interest rates, and the vast majority of fund managers (75%) expect this to happen sometime in the fourth quarter. The 12+-month repo rate remained at 6.65%, while the 10-year bond yield increased to 8.89% from 8.69%, reports BAML.
The firm also found that the ZAR forecast weakened from $12.79 to $13.17, which was a high point in their survey. Further, 60% of fund managers believe the ZAR will firm up in the next year. They’re expecting to see a “mild” tightening cycle of 150 basis points and would purchase bonds with yield rates of 8.5% to 8.75%.
Fund managers low on domestic equities
BAML also reports that managers are only expecting a 2% total return for equities over the next 12+ months, compared to a 7% return for bonds and 8% for cash.
The firm states that the portfolio weights for domestic equities and resources are at survey lows.
Funds are long on banks and ZAR hedges but short gold
Looking at equity sectors, they say Industrial holdings are close to survey highs, although they are now the least-preferred.
Net 80% of fund managers are overweight cash and banks, while half are overweight offshore assets. At least half of managers are underweight equities and resources. According to BAML, 90% of managers are worried about earnings and/ or de-rating risk, while half believe resource and rate-sensitive earnings remain “too high.”
Further, the firm reports that fund managers have a high conviction on Financials, which is the most-preferred sector among them right now, and gold. More specifically, managers especially like banks, general miners and beverages, food producers, and tobacco (ZAR hedges/ defensives).
The least-preferred sector is Resources.
Assets that are the most disliked are gold, retailers, and media and construction. In terms of improvement, Telecom and general minors became a little more preferred than before, while life and chemicals became the most less-preferred by managers compared to last month.
Here’s a broader look at some of the key points from BAML’s latest survey of fund managers
All charts/ graphs in this article are courtesy BAML.