Global investors more risk averse, seeking protection

Lastet investor survey from BofAML is out, and guess what… people are more bearish than a couple of months ago… Yet their bearishness translates into more portfolio protection rather than simply get off the boat. So far, that’s probably the least painful trade.

From Merrill’s note:

« The FMS Skinny

Fed and Greece concerns…investors sell stocks, reduce risk and raise cash over the past four weeks; Q3 pain trade thus higher; We think US and EM have the best potential upside if concerns prove unfounded.

Enter the Fed…Exit the Risk

54% of investors expect a September Fed hike; net 80% expect higher short rates, just 4% lower bond yields next 12-months. Cash levels spike to 4.9% (highest since January when FMS cash combined with BofAML Breadth Rule to generate a “buy” signal). The percentage of investors taking out « protection » against an equity fall in the next three months hits record high.

War & Greece

Investors do not appear positioned for Greek “worst case”: 43% expect a good resolution; 42% say default but no GREXIT; just 15% expect GREXIT. We believe a peaceful Greek outcome is a necessary condition for a rally.

Growth is not the Fear FMS concerns focused on inflation (expectations at 4-year high), margins (forecast at 20-month low); corporate balance sheets (most “levered” since Jun’10); China (69% say equity « bubble”); and potential for « flash crash” in government bonds.

Client positioning in past four weeks…

…up in banks (4th highest in 12 years), commodities (10-month high), industrials (11-month high); down in staples (4th lowest in 10 years), EM (15-month low). Investor positioning remains structurally skewed toward strong-US$ in H2 (Chart 1).

June contrarian trades:

Buy EM, resources, staples; sell EAFE, banks, discretionary. And note allocation to equity relative to commodities lowest since 2012. May trades: US outperformed UK but utilities underperformed tech. »

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