Cash has been the hot asset among investors as investors now hold the most cash since November 2001, according to Bank of America Merrill Lynch. The firm released the results from its latest Fund Manager Survey on Tuesday, reporting that cash is now at 5.6% and that this is an “unambiguous ‘buy’ signal.”
Investors are long on cash
BAML Chief Investment Strategist Michael Hartnett and his team cited their general “FMS Cash Rule” as the reason such high cash levels are a buy signal. They describe their rule as:
“When average cash balance rises above 4.5% a contrarian buy signal is generated for equities. When the cash balance falls below 3.5% a contrarian sell signal is generated.”
The BAML said their recent survey also indicated that investors are seeking capital preservation. This month has brought a rotation to cash, as well as utilities, bonds and telcos.
Meanwhile investors are moving out of banks and stocks, they said. Despite the rotation out of stocks, however, they are still long as the positioning plunged from net 21% to 5%.
Growth expectations turn negative
The investment strategy team added that expectations for global growth and profits have turned negative for the first time since July 21. Specifically on China, they said growth expectations are at the weakest level since December 2008 with 71% of investors expecting the nation’s economy to weaken over the next year.
Interestingly, some investors still don’t expect the U.S. Federal Reserve to hike interest rates even though regulators have set forth a plan to do so. BAML’s latest fund manager survey found that 23% of are not expecting any rate hike this year, while 33% expect one hike and 34% expect two hikes. This is quickly becoming a pain point because, as economist David Rosenberg warned recently, it’s important that investors get their expectations regarding rate hikes in line with the plans of policymakers (who have indicated four potential rate hikes this year) or trouble could erupt.
Despite all the problems though, the BAML team found limited investor capitulation in their long positioning in the U.S. dollar, the euro, Japan and the Tech sector. Their survey also indicates that the most crowded trades right now are longs on the U.S. dollar (30%); oil shorts (25%); emerging market shorts (16%); and long on FANG (12%), a.k.a. Facebook, Amazon, Netflix, and Google.
Additionally, they said the most popular short positions remain stubbornly the same: Energy, emerging markets, Materials, Commodities, and Industrials.
Recession fears retreating
One bit of especially good news in BAML’s survey was that investors appear to have reset their macro and market expectations lower. While this apparently hasn’t trickled down to the topic of Fed rate hikes, economists appear to have succeeded in calming down investors on the topic of recession.
BAML found that investors now see defaults and recession as risks rather than reality. However, despite this move, 19% of investors still see a recession as being “likely” in the next 12 months, which is an increase from 12% previously.
Also a net 16% of investors are now expecting the economy to weaken over the next 12 months, which is the most negative reading the firm has had since December 2011.
Additionally, Hartnett and team said investors are a lot more worried about what they own instead of what they don’t own. They said the U.S. dollar is now the most overvalued since November 2006.