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Stocks are up, corporate earnings are rising and the global economy is healing – but global money managers are retreating from risk.
According to the latest monthly survey from Bank of America, fund managers are raising cash levels and lowering their exposure to equity markets, both of which are seen as defensive strategies.
Average cash levels have risen to 5 per cent, up from 4.8 per cent in April, which is the highest level in nearly two years. Similarly, a net 37 per cent of managers are now "overweight" equities – devoting more than usual space in their portfolios to stocks – down from a net 45 per cent last month.
"Respondents to the global survey are confident that both the world economy and corporate performance are improving, but question the rate of growth," Bank of America said in a release.
Indeed, 72 per cent of respondents expect the global economy will grow "below trend" and a net 20 per cent expect corporate profit growth will fail to exceed 10 per cent.
More specifically, the respondents are scaling back on investments in the United States and increasing them in Europe. Within sectors, they are decreasing their exposure to banks and technology, and increasing their exposure to more energy stocks and utilities.
The survey, conducted in the first week of May, consisted of 218 panelists managing a combined $587-billion in assets – which provides a pretty good indication of what the so-called smart money is thinking about these days.
Their more defensive nature comes at an interesting time for the stock market. The S&P 500 has risen about 185 per cent from its low in 2009 and has not suffered a correction of 10 per cent in more nearly three years – an exceptionally long time without serious turbulence and a key reason to fear that trouble could be brewing.
The Federal Reserve is tapering its bond-buying program, known as quantitative easing. Many observers believe the central bank will start to raise its key interest rate some time next year, posing another potential obstacle to a bull market that has been fed stimulative monetary conditions since its start more than five years ago.
It is only natural, then, that money managers would want to take some risk off the table. However, there is a big difference between lowering risk and positioning for a debacle.
Yes, some observers are convinced that the Federal Reserve is creating another bubble that will soon pop. Jeremy Grantham, the co-founder and chief investment strategist at Boston-based GMO, argued recently that the stock market is in its "last hurrah" stage. John Hussman, of Hussman Funds, believes that the market will "lose a large fraction of its value over the next few years."
For the most part, though, Wall Street remains cautiously optimistic this year, with targets implying modest gains ahead. At the start of the year, the average year-end target from strategists for the S&P 500 was 1955, or about 3 per cent above the current level.
In fact, one of the reasons for their optimism is that investor expectations are relatively low, which keeps valuations at acceptable levels. Michael Hartnett, chief investment strategist at Bank of America, pointed out that the S&P 500 has risen about 14 per cent over the past 11 months, when money managers have been relatively nervous with cash levels above 4.4 per cent.
"Investor 'fear' suggests path of least resistance is up," Mr. Hartnett said in a note.
David Berman