The fall in oil prices has pushed the energy sector to a record underweight, a recent survey among fund managers by Bank of America Merrill Lynch showed.
The materials sector had the largest underweight since the Lehman collapse in 2008, while consumer discretionary — where investors put cash in the expectation that savings on fuel will be spent on consumer goods — was at a record overweight.
Contrarian investors should go long UK assets and short US, long pharmaceuticals, energy and materials and short technology.
December’s contrarian trades – long industrials and energy and short consumer discretionary and telecoms “posted modestly positive returns,” Bank of America Merrill Lynch said.
The survey was carried out between January 9 and January 15 among 177 participants with $514 billion in assets under management.
Investors remained “amply overweight” equities and real estate, while cash levels fell sharply, to 4.5% from 5%.
Commodities are “still shunned”, while fixed income is unattractive because of lower bond yields.
The percentage of investors who believe oil is overvalued is at the most negative level since January 2009 – in other words, oil is at its “cheapest” since January 2009.
“If oil boosts non-US growth over the next two months investors will win; if not/US growth stumbles, a large risk-off asset allocation shift is likely,” the Bank of America Merrill Lynch report said.
A telling detail is the fact that the percentage of investors who want companies to increase capital expenditure at the expense of dividends, share buybacks or debt repayment rose this month.
In a conference that was dubbed a “bear fest” last week, Societe Generale’s strategist Albert Edwards warned that it is capital expenditure by companies that boosts growth, not consumer spending.
Geographically, in terms of positioning, between December and January investors increased their overweight in the US and reduced sharply their allocations to emerging markets and the UK.
On the macroeconomic front, the percentage of investors who expect stronger growth for the next 12 months fell to a net 51% from 60%, but still remained resilient in the face of inflation expectations that collapsed.
Regarding companies earnings, a net 53% of investors believe they will not improve over the next 12 months, while a net 52% believe consensus estimates for earnings per share are currently too high.
In a separate survey of fund managers in Europe only, carried out among 97 participants with $231 billion of assets under management, nine in 10 said they expected the European Central Bank to launch quantitative easing.
Of these, 72% believed it will happen in the first quarter, higher than the 41% that expected this to happen in November.
The proportion of fund managers who did not expect the ECB to print money has fallen to 5% from 25% in November. This is the lowest proportion since the question was introduced in the survey, in May last year.