How Are Fund Managers Positioned In Global Markets?
Weekly Notes With Tiho — Issue 7
Location: Phi Phi Islands, Thailand
Here I am.
Leaving Thailand's beautiful paradise of Phi Phi Islands.
Clearly, I am in deep thought about the state of global economy, financial markets, and geopolitical affairs.
Like all the other hedge fund managers, newsletter writers and macro thinkers of our time.
I'm just joking with you.
I'm actually enjoying the scenery and crystal clear waters. I just forgot my sunglasses.
Having said that, later that night on the flight I was reading a favorite sentiment report of mine and I thought it would be appropriate to do a post on it.
Investor sentiment can be a very useful measure.
It helps you figure out what the consensus is thinking and how they are positioned.
In the wise words Bridgewater hedge fund master:
You have to be an independent thinker because you can’t make money agreeing with the consensus view, which is already embedded in the price. Yet whenever you’re betting against the consensus, there’s a significant probability you’re going to be wrong, so you have to be humble.
~ Ray Dalio
Independent thinker is usually, but not always, referred to as a contrarian investor.
While there are many ways to skin the cat, a contrarian approach has been one of my main styles when it comes to investing capital.
Naturally, I happen to be a keen follower of various market sentiment measures.
This also includes the popular Merrill Lynch Fund Manager Survey, which I will discuss with you today.
Fund Managers View On Equities
Global stock markets have risen sharply over the last year and a half.
And with it, investor sentiment.
Global fund managers held a tiny 5% overweight exposure to global equities in February 2016.
That was pretty much one standard deviation underweight their historical exposure.
Observing the chart below, a pessimistic reading like that is usually a signal that markets are close to a major low… with 2008 crash being an outlier.
When I compare early 2016 exposure to the last five months, one thing is clear.
Global investors are not pessimistic anymore.
And they are not just thinking it — they are also acting it.
The average global equities exposure over the last five months stands at 42% overweight.
Yes. You are right.
It could go higher. It has before and it will probably do so again.
However, there are no clear-cut rules when it comes to investor behavior.
After all, we are only human.
The key takeaway is that the easy money — coming out of the 2016 panic lows — has been already made.
Eurozone Back On The Radar
Let us break down this exposure regionally.
I usually track equities based on a handful of “common sense” regions.
These are North America, Eurozone, Asia Pacific, Emerging Markets and Frontier Markets.
Since the lovely boys and girls over at Merrill Lynch don’t break the data like this, I will use their methodology.
The focus will be on the US, Eurozone plus Japan, and Emerging Markets as the three main regions.
Developed markets excluding the United States can basically be summarized into Eurozone and Japan.
Fund manger’s equity exposure for these two regions was rather depressed during Brexit in July 2016, when it stood at -6% underweight relative to the historical mean.
Equity exposure is now more than one standard deviation above this mean, with a May 2017 reading at 36%.
I have been very bullish Europe since the Brexit panic.
My clients have benefited by the outperformance.
Furthermore, I have already explained before that based on various valuation metrics, foreign equities (including EU & EM) should outperform their US counterparts over the coming years.
However, the recent vertical rise in the price of EU stocks on French election news, together with overly bullish exposure, has me sitting on the sidelines for the time being.
What About Emerging Markets?
Maybe I should be more interested in Emerging Markets instead?
Well, to be quite honest, a similar set of investing conditions exist here too.
Firstly, let us remember that Emerging Markets have been the best performing region over the last twelve months.
After such an awful period of underperformance in 2014 and 2015, EM stock market is on a stellar run.
It is beating US equities, EAFE equities, US Real Estate and Gold.
Secondly, Emerging Markets are once again approaching a meaningful cluster of resistance levels holding this equity market back since the 2007 peak.
Finally, the exposure by global fund managers is one standard deviation above the mean.
In plain English…
The Wall Street guys are bullish, so I don't want to chase.
These are the same guys predicting a 1998 style EM crisis only 2 years ago.
Basically, when the bears turn into bulls — it's my job to be worried.
So I’m sitting on the sidelines here too.
However, I want to make one thing perfectly clear.
Foreign stocks are extremely depressed relative to the US.
On any significant pullback, I will expose my clients and myself to these underpriced and attractive markets even more.
What Does Merrill Lynch Say?
Observing the chart below, you can see that European continent currencies (Euro & Pound) are very much disliked and exposure towards these assets is at historical extremes.
Obviously, the other side of this trade is the overpriced US Dollar, according to the May 2017 survey.
Bonds are also disliked and underexposed, as fund managers anticipate the rise of inflation.
Capital is currently chasing Eurozone and EM equity regions, as already discussed above.
Most favorite of asset classes for investors right now is the banking sector. Exposure here stands at 1.9 standard deviations above the historical mean.
However, it is the technology trade (long Nasdaq) that takes the cake.
It is the most overcrowded trade, according to the survey.
And without a surprise, the euphoric sentiment is confirmed by the recent front cover of The Economist magazine — probably the greatest contrarian indicator of all time.
Is Tail Risk Something You Should Be Worried About?
China is back on the front pages once more.
Last time it was the Yuan (RMB) devaluation worries.
As stated at the beginning — investor sentiment is a useful measure. But it can only tell you so much.
This post gives a glimpse into how market participants, some of whom manage billions over billions, are positioned right now.
What you need is someone with expert skills to make the correct tactical overweight and underweight portfolio decisions, away from these consensus trades.
Someone with the ability to read the changes in trends and catch the outperformance in equity regions.
And someone with the risk management mastery to protect your wealth in these volatile times.
If you would like to know how I am positioning my client’s portfolios — get in contact by clicking below and filling out the brief survey.
I’ll get back to you within 24 hours.