An investor survey showed such “unambiguous pessimism,” that either risk assets are ripe for a rally or the markets are positioning for a recession and/or an imminent debt default, according to Bank of America Merrill Lynch research, which carried out the survey.
The poll was carried out among 214 panellists with $593 billion worth of assets under management between September 4 and September 10.
It found that fund managers cut allocations to stocks and commodities to 2008 levels, fleeing to the perceived safety of bonds, which saw the highest allocation since May 2013 this month, and to cash.
Cash levels rose to 5.5%, equal to the highs reached in 2008 and at a level where they triggered a contrarian buy signal for equities.
The rule is that the contrarian buy signal is generated whenever the average cash balance rises above 4.5%, and a contrarian sell signal is generated when the cash balance falls below 3.5%.
The percentage of investors who listed a recession in China and a debt crisis in emerging markets as the main risks facing the global economy has increased this month from last month.
Investors don’t believe the Chinese stock market crisis is over, with 52% expecting the Shanghai Composite index to be lower over the next six months and only 35% expecting it to be higher.
One in three investors see stocks as the most vulnerable asset class to an interest rate rise by the Federal Reserve, followed by government bonds, currencies, corporate bonds and commodities.
Looking at equity allocation geographically, allocation to US stocks improved to a net 6% underweight from 14% net underweight last month, in line with the long-term average.
Allocation to UK equities fell to a four-year low of net 25% underweight, 1.2 standard deviations below its long-term average.
By contrast, allocation to stocks in the eurozone is 1.2 standard deviations above its long-term average, at a net 45% overweight, slightly lower than last month’s 47% net overweight.
Allocation to emerging market equities fell to another all-time record low, of 34% net underweight, in line with capital flows data showing investors fleeing this asset class.
Looking at sectors, allocation to energy hit another record low too, with investors being net 33% underweight. That is 2.7 standard deviations below the long-term average, making energy “by far the most detested global sector.”
Investors reduced allocations to healthcare, telecoms and industrials in September and added to staples and technology.