Eurozone Equities Favored Despite French Election

Investors hold firm to their Eurozone equities despite growing worries about the outcome of the French presidential election, according to the latest poll on investor positioning published by Bank of America Merrill Lynch.

Investors consider a « Le Pen Win » might produce a 5-10% market correction, but the real risk would be a Europe disintegration in the case of « Frexit », which would have deeper and far more negative implications.

Source: Bank of America Merrill Lynch

Cash balance, which is viewed as a contrarian indicator (higher cash = buy signal) is at 4.9% (vs average of 4.5%).

Most crowded trades are Long US Dollar, Long US/EU Credit, Long Banks, Short Government Bonds, Long NASDAQ, Short RMB.

Key risks identified by investors include: EU disintegration, delay in US corporate tax reform (considered to provide additional boost to US EPS growth), trade war (another Trump related matter), bond market crash, Chinese credit tightening.

The survey often draws paradoxical views. For instance, 50% of surveyed investors expect global EPS to continue growing, which is a relatively high proportion of respondents being positive.

At the same time, 32% of respondents say equity markets are overvalued, but this is mainly because the vast majority consider US equities as overvalued while Europe, EM and Japan are considered undervalued (EM being the cheapest asset since end 2013).

Source: Bank of America Merrill Lynch

In terms of sector allocation, Technology, Banks are the most preferred, Pharma, Insurance, Consumer discretionary, Industrials, also preferred but less so.

Biggest underweights go to Utilities and Telecoms, followed by Consumer staples, Materials and Energy (this last one is probably a contrarian call if you expect commodities prices will rebound on the back of better macro trends).