Another sentiment gauge hitting an extreme – but as with everything else nowadays it will only matter when it matters. It used to be when everyone was on the same side of the boat, the market went the opposite way….
- Investors were their most bullish on equities and commodities in nearly 10 years this month as optimism about growth surged, while inflation concerns led them to drastically sell down emerging stocks, a survey showed on Tuesday.
- The monthly global fund managers’ survey from Bank of America-Merrill Lynch showed a net 67 percent of respondents were overweight equities in February, compared with 55 percent in January. This month’s reading means the difference between overweights and underweights is 67 percentage points — a level seen for the first time since the poll started in April 2001.
- The poll, which surveyed 188 participants who manage total assets of $569 billion, also showed a collapse in emerging markets allocations. A net 5 percent of respondents are overweight here — the lowest since March 2009 — compared with 43 percent in January and an average reading of 27 percent. Inflation expectations hit a 6-year high, with a net 75 percent of respondents expecting higher inflation in the next 12 months.
- “It’s one of the most bullish surveys we’ve had in a long time. Basically the story is growth expectations keep going on higher… What we’re seeing is fairly extreme asset allocation decisions,” said Patrick Schowitz, equity strategist at BofA Merrill Lynch.
- “Warning lamps are really flashing. But we’ve seen a …shift out of fixed income and into equities. You would expect some extreme asset allocation into risky assets while that shift is going on,” Schowitz said.
- Commodities are the second most favored asset class after stocks, with a record net 28 percent of investors being overweight from 16 percent last month.
- Cash underweight positions moved to a net 9 percent, levels not seen since January 2002, from 5 percent in January.
- Hedge funds were also becoming bullish, raising their gearing levels. The ratio of gross assets held by hedge funds relative to their capital rose to 1.49, their highest since March 2008, from 1.26 last month. (hedge funds are levering up, and in a substantial way between January and February)
- Their net exposure to equity markets — measured as long minus short as a percentage of capital — rose to 39 percent, the highest since July 2007, from 31 percent in January.
This is a guest post written by Trader Mark who runs the blog Fund My Mutual Fund.
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