BofAML: Managers Increase Cash Levels, EM Exposure as Worries Mount

Sep 13 2016 | 11:38pm ET

Investors have upped their cash holdings and increased exposures to emerging market equities amid concerns about a looming bond market selloff and sky-high stock market valuations in developed nations, according to Bank of America Merrill Lynch’s most recent fund manager survey. 

The poll shows fund managers remain worried that years of accommodative central bank policies, including quantitative easing, ZIRP and NIRP, have pushed both equities and bonds to their most overvalued levels in recent memory. 

Undoubtedly of interest to contrarians, the survey showed a whopping 82% of respondents describe bond prices as "frothy", while they continue to flock to emerging market equities - a net 24% are now overweight, versus 13% last month.

The survey consisted of 208 fund managers managing $579 billion, according to Reuters, and was carried out from Sept 2-8 against renewed speculation about the timing of the next rate hike by the U.S. Federal Reserve. Importantly, the survey concluded before markets corrected sharply on September 9, suggesting the fund managers were on the right track. 

Cash holdings among respondents increased to 5.5%, higher than recent readings but still lower than July's 5.8%, which was the highest in fifteen years. 42% of those polled said they had "a bearish view on markets" and 20% attributed high cash weightings to "preference for cash over low-yielding equivalents," Reuters reported.

On the flip side, more than a quarter of participants expect the global economy to improve in the next 12 months, the highest proportion in nine months. Meanwhile, 61% percent are bracing for higher global 10-year bond yields despite broad expectations that negative interest rates in Europe and Japan will continue. 

Managers also dramatically pulled in their horns regarding equity markets, shrinking the net overweight on stocks to 1% in September compared to 9% a month earlier, while U.S. equity allocations fell to a 7% underweight from last month's 11% overweight.

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