The strong U.S. dollar has been a major pain point for U.S.-based companies for the last year or so, and now fund managers say they think the most vulnerable trade is the long dollar trade this month, along with related positions. As someone smart noted but we forgot how many of these hot trades are really the same as long USD is similar to short commodities, short EM. So the trade is perhaps even more crowded than the chart below indicates.
Most fund managers expect rate hike next month
Bank of America Merrill Lynch investment strategists Michael Hartnett, Brian Leung and Garrett Roche released the latest edition of their “Global Fund Manager Survey” this morning. They report that 81% of fund managers are expecting the U.S. Federal Reserve to finally start raising interest rates in November. That’s a significant increase from last month when only 47% of the surveyed fund managers said they expected a rate hike.
The acceptance that a Fed rate hike is coming has resulted in the biggest month over month drop in allocation for utilities in five years, they report.
The analysts also say growth expectations have bounced, hitting 15-month highs in China. Also perceptions of liquidity within the markets have finally risen from their three-year lows. However, the BAML team called November’s profit expectations bounce this month “notably flaccid” and expectations for margins the “weakest” in three years.
Long dollar – Cash levels on the decline
The analysts also found that fund managers are reporting cash levels at 4.9%, which is a decline from the previous 5.1% but higher than the average of 4.7% following the “taper tantrum,” they said. BAML’s Risk Index has now climbed to its highest level in seven months.
Another trend the BAML team noted this month was a new extreme in developed versus emerging markets. They found that this month brings the biggest long on developed markets compared to emerging markets in the history of their recordkeeping.
They also found that fund managers are at their second most overweight position on the Eurozone in history and at the third largest underweight position on emerging markets ever.
Investment styles
Fund managers are also holding their second biggest overweight position in tech ever, and their third biggest overweight in banks. Further, industrials longs have hit a three-year low, and fund managers see the U.S. dollar as being at its second most overvalued level in six and a half years.
The BAML team also found that fund managers are reporting the biggest overvaluation of U.S. equities versus the Rest of the World ever in history.
BAML added a new question regarding investment styles to their fund manager survey this month. They learned that net 61% of fund managers are expecting high quality stocks to outperform those with low quality. Further, net 24% expect stocks with high yields on their dividends to outperform, while 22% believe large cap stocks will come out ahead of small caps. Twenty-one percent of fund managers believe high yield bonds will perform better than high grade bonds.
All graphs/ charts in this article are courtesy Bank of America Merrill Lynch.
