Cash lev­els are Climb­ing... A Re­flec­tion of Hedge Fund Sen­ti­ment?

The Economic Times - - Commodities Plus -

Michelle Jones

The volatil­ity we’ve seen through­out the mar­kets is be­ing re­flected in fund man­ager sen­ti­ment as we are get­ting mixed mes­sages in­volv­ing cash and low con­vic­tion lev­els. It seems the fears of a global re­ces­sion are start­ing to fade, how­ever, ac­cord­ing to the lat­est edi­tion of Bank of Amer­ica Mer­rill Lynch’s Fund Man­ager Sur­vey.


Chief In­vest­ment Strate­gist Michael Hart­nett said in a re­port dated April 12 that cash lev­els climbed from 5.1% to 5.4% this month, ac­cord­ing to their lat­est sur­vey. He said this jump sym­bol­ises the di­rec­tion in sen­ti­ment among the world’s fund man­agers, although it runs counter to the con­vic­tion level, which he said tum­bled to its low­est level in 18 months. Fund man­agers are con­cerned about Quan­ti­ta­tive Fail­ure as this is the first time they turned Un­der­weight on Ja­panese eq­ui­ties since De­cem­ber 2012. They’re also wor­ried about a lack of fol­lowthrough to the mas­sive short squeeze we saw last month in com­modi­ties, re­sources, and emerg­ing mar­kets. Hart­nett also said that this is the first time in years that there’s a dis­con­nect be­tween fund man­ager equity val­u­a­tion and al­lo­ca­tion. He adds that the high cash lev­els pro­tect against down­side risk, although the val­u­a­tion holds back up­side risk. He pre­dicts that risk as­sets will stay in the trad­ing range.


The BAML strate­gist be­lieves the cur­rent cash lev­els are “su­per­fi­cially bullish” right now, adding that cash al­most never climbs so much dur­ing a risk rally. He said they’ve only recorded nine times this has hap­pened since Jan­uary 1998. They also saw the seventh high­est bond and equity val­u­a­tion read­ing in 13 years, which he ex­plains is the best rea­son for this phe­nom­e­non. Hart­nett said they now have a con­trar­ian buy sig­nal for eq­ui­ties ac­cord­ing to their FMS Cash Rule. The rule states that an av­er­age cash bal­ance higher than 4.5%, trig­gers a con­trar­ian buy sig­nal, while a cash bal­ance be­low 3.5% trig­gers a con­trar­ian sell sig­nal.


BAML’s sur­vey in­di­cates a strong ro­ta­tion into Consumer Sta­ples and cash and away from Ja­pan, Consumer Dis­cre­tionary, Com­modi­ties and the Eu­ro­zone.


Fund man­agers’ ex­pec­ta­tions for global growth re­main low but are stable and that 82% say a re­ces­sion is “un­likely” over the next 12 months.

(From Busi­ness In­sider, copyright to Value­walk)

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