If you are a contrarian, your best bet for July would be to go short banks, as a fund managers survey by Bank of America Merrill Lynch revealed there was a record long in global banks in the month.
Cash levels jumped to the highest level since the collapse of Lehman Brothers, confirming a “buy” signal from late last week.
The trade to go long if you are a contrarian this month is energy.
Other contrarian trades for July are: long emerging markets, short Japan, long commodities, short cash, long consumer staples short consumer discretionary, long large caps, short small caps.
The survey, carried out between July 2 and July 9 among 149 participants with $399 billion in assets under management, also revealed the firs “undervaluation” reading (-1%) for gold since August 2009, when investors were still worried that central banks, which were gearing up to start quantitative easing, would spark inflation.
In terms of positioning, there were big cuts in weightings to commodities, telecommunications, energy and eurozone equities in July from June, and big increases in weightings to cash and banks.
Cash levels surged to 5.5%, the highest level since December 2008 and above the 4.5% which triggers a contrarian “buy” signal for equities in the survey’s Cash Rule. A contrarian “sell” signal is generated when the cash balance falls under 3.5%.
The most crowded trade of July is long US dollar, followed by long US high-yield bonds, long eurozone periphery debt, long US technology equities and long Eurostoxx 50 – the eurozone’s blue-chip index.
On the macroeconomic front, expectations for global growth are at nine-month lows, although inflation and profit expectations are stable.
When it comes to China, however, growth expectations have plunged, with a net 62% of fund managers surveyed expecting the Chinese economy to weaken over the next 12 months.
On a 12-month horizon, the fund managers expect Chinese economic growth of 6.5%, while the US economy is expected to grow by 2.4%.
A breakdown of the eurozone was quoted as the biggest risk by the survey participants, due to the ongoing and increasingly difficult negotiations regarding a third bailout for Greece, as well as the possibility that the country leaves the eurozone.
The second biggest risk is seen that of a Chinese default on debt, most likely highlighted by the collapse of the Chinese stock market, where a stock bubble was inflated by borrowing.
Expectations of a Federal Reserve interest rate rise shifted to the fourth quarter of this year from the third quarter, most probably due to various global headwinds and the strength of the dollar that threatens to weigh on the US economy.
In terms of asset allocation, equity allocation went up to net 42% overweight from net 38% overweight last month, while bond allocation was 60% underweight compared with 58% underweight last month. A net 22% were underweight commodities.