Contrarian investors should buy US stocks and stay away from Europe, a survey of fund managers by Bank of America Merrill Lynch shows.
US equity allocation fell to its lowest level since January 2008, despite the fact that the S&P 500 hit another record high, according to the survey carried out between May 8 and May 14.
A total of 208 panellists with $607 billion worth of assets under management took part in the survey.
The relative positioning of investment in the US versus the rest of the world is at the most extreme level since November 2007.
“Contrarians would go long US equities relative to the broader market,” the analysts at Bank of America Merrill Lynch said.
Allocation to US stocks fell to a net 19% underweight from last month’s 12% net underweight, 0.7 standard deviation below the long-term average.
By contrast, eurozone equities are still the preferred asset class, with investors increasing their exposure a little more in May, from a net 46% overweight to a net 49% overweight.
The current allocation to eurozone equities is 1.4 standard deviations above the long-term average.
The survey shows that Germany is the country that fund managers want to overweight the most over the next 12 months, with a net 43% of them, followed by Spain with a net 29% overweight.
The least preferred European country by fund managers was Switzerland, with a net 37% underweight. It was followed by France, with a net 29% underweight.
UK equities have seen the biggest improvement: they were up to a net 3% overweight in May after showing a net 50% underweight in April.
This is largely due to the results of the general election that handed a straight victory to the Conservatives, who can now form a government without needing to resort to a coalition.
Investors in emerging markets equities have pared back their negativity to a net 6% underweight from April’s net 18% underweight.
The allocation is still 1.3 standard deviations below its long-term average, making long emerging markets short Japan another contrarian trade.
Other contrarian trades are: long utilities, short technology, short discretionary goods long energy, short banks long materials.
On the macroeconomic front, inflation expectations jumped to a 10-month high on the back of higher oil prices.
Growth expectations have remained high as well, with 70% of respondents saying they expect “stronger” growth compared with just 11% who expect it to be weaker.
A net 77% expect higher long-term interest rates in 12 months time, and the consensus expects a steeper yield curve.
Cash levels fell slightly to 4.5% from April’s 4.6%. Bank of America Merrill Lynch has a rule that, when the average cash balance rises above 4.5% a contrarian “buy” signal is generated for equities. A contrarian “sell” is triggered when the cash balance falls below 3.5%.