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Fund managers turn defensive as markets hit highs

Managers are switching into defensive sectors and holding higher levels of cash as a result of valuation concerns.

 
Fund managers turn defensive as markets hit highs

Global fund manager allocations to defensive sectors have reached an eight-year high, according to Barclays.

The bank found that fund managers now allocate more money to defensive sectors than those that rely on the health of the economy. It represents the first time that global fund managers have positioned their portfolio in this way since early 2009, and comes as markets in the UK, US and Europe trade near all-time highs.

The switch is mostly due to a shift out of technology stocks, with 8% of funds lowering their exposure to the sector during the second quarter. Nevertheless, global funds remain overweight tech, healthcare, staples, and telecoms in comparison to their benchmarks. 

Managers moved out of sectors that are more cyclical in nature, such as financials, energy and materials, to a level that hasn't been seen for a decade.

It was a different story for European funds. Barclays found these funds were overweight cyclical sectors relative to their benchmarks, with fund managers running relatively high allocations to technology and energy. Financials also found favour, with 40% of European funds running an overweight position in the sector relative to their benchmark.

Valuation warning

Separate research from Bank of America Merrill Lynch also showed that fund managers had grown cautious. European fund managers are sat on an average cash pile of 5.3%, the highest figure since March 2003.

Bank of America Merrill Lynch found the average cash position amongst global fund managers was a little lower at 4.9%, higher than a 10-year average of 4.5%.

Higher cash piles help to explain why 46% of managers - a record high - described the market as looking overvalued. Their outlook for earnings was also negative.

Only a third of investors surveyed expect corporate profits to improve over the next year, down 25% from the beginning of the year. This is the lowest level since November 2015.

Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, said the outlook for corporate profits had taken an ominous turn this year. In his opinion, this should be taken as a warning sign for equities over bonds, high yield over investment grade, and cyclical sectors over defensive ones.

‘Further deterioration is likely to cause risk-off trades,’ he said.

The global economic picture represented another concern for fund managers. For the second month running, investors highlighted policy mistakes by the Federal Reserve and European Central Bank, alongside a crash in global bond markets as the two biggest risks facing markets. 

Fortunately, it wasn't all doom and gloom from the fund managers. There was a 6% increase in the number that expect a ‘Goldilocks’ scenario of above-trend growth and below-trend inflation to 42% of the sample. Almost half of investors said they would be ‘most surprised' to see a recession over the next six months.

8 comments so far. Why not have your say?

PaulSh

Aug 16, 2017 at 08:30

Markets looking overvalued? What a startlingly original idea! No wonder we pay these people so much money.

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BOB 2

Aug 17, 2017 at 00:12

it's unpredictable, but it's a sure thing this all time highs can only go on for so long , with every body talking about a crash , last week was a warning

so hold onto your hats this may be the build up before the eruption, gold's doing well i wander why

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William Phillips

Aug 17, 2017 at 11:01

Yet the VIX measure of volatility on the S&P 500 is at an historic low, implying that dealers don't foresee violent movement either way.

This could be because the equity market is more and more locked into program trading; but that stasis could shatter bigly if nerves break, since more than ever everybody has positioned themselves the same way under computer guidance. Less scarily, holding for income or lfor ong-term potential a la Scottish Mortgage, instead of trading for short-term gain, may have become innate after 20-odd years of flatlining major indices and value attrition after inflation among blue chips. However, investment styles go out of fashion in time.

Wall Street has become like Hollywood- nobody knows anything. But contrary to latter-day conventional wisdom, this time it IS different. The VIX could reflect calm before storm.

Colossal, unprecedented distortions have been introduced by a decade of artificially, extremely cheap money. Behind it lies the elite's terror of unleashing populism by letting stock prices and real estate values slide. But because they want the status quo to drift on eventually does not mean they can ensure it does. Too many seek payback for the big fix of 2008-09. In markets, sooner or later, something always gives.

We have been in a kind-of bull market since Q1 2009: longer than at any time since the 19th century. I doubt central bankers and globalist national leaders can guarantee the cycle has been abolished, any more than Gordon Brown could.

Secular forces of disruption, quite apart from possible unwinding of the sticking-plaster decade's effects, are massing remorselessly. We could face a perfect storm of deflation- or hyperinflation to keep anaemic growth going- combined with the savaging of jobs and wage rates to be caused by AI, the internet of things and the competition of cheap-labour workforces east of Suez.

The long, shallow bull run could be corrected in a short and very sharp way.

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Abstract Artist

Aug 17, 2017 at 17:44

An excellent analysis of the current state of play William Phillips.

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PaulSh

Aug 19, 2017 at 15:11

@William Phillips, the volatility has moved to the currency markets. But yes, agree with just about everything you say. The worst case scenario is that even the most prosperous countries will end up looking something like Weimar Germany.

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King Lodos

Aug 19, 2017 at 22:00

But with inflation looming, it's rare money would leave relatively-inflation-protected stocks to buy US treasures yielding sub-2.5%, inflation-linked bonds yielding negative, or park in cash.

It took 10yr bond yields around 7% to get people out of stocks in the Tech boom, and the threat of global financial collapse to spark the next sell-off.

Just seems to be too much support for stocks .. Baring something no one sees coming (always the risk with stocks) I think it'll come down to comparing stock earnings yields with what you can get on 10yr treasuries to work out when it's time to start buying bonds again.

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citymoke

Aug 20, 2017 at 03:41

I predict that any bubble burst in stock markets could be very slow with a pin prick in the balloon letting the air out very slowly over some years. The thing is, with more and more people retiring throughout the world relying on dividends from stocks and shares and with no end in sight to poor returns from cash/bonds etc., share prices could well be held artificially high for quite some time yet as pensioners will be reluctant to get rid of stocks whilst companies are paying out in the region of 3 to 5% plus dividend yields. The trend (outside the UK) towards companies paying dividends where previously it was not the thing to do, is gathering pace it seems and global markets now have companies that are willing to issue dividends whereas previously they may not have entertained such a move.

So, we might see markets bouncing around present levels for some time to come with possibly a slight drift downwards over the next 5 years or so.

Or, I could be completely wrong, and all markets could drop 50% tomorrow morning!

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William Phillips

Aug 21, 2017 at 10:58

"I predict that any bubble burst in stock markets could be very slow with a pin prick in the balloon letting the air out very slowly over some years."

They don't usually behave so obligingly. The trajectory of the stick is sharper than that of the rocket.

Markets have spent three-fifths of their time going up and two-fifths going down since 1900. After 8.5 years we are overdue for some more of the two-fifths.

It would be nice to think that so many more investors will hang on for their dividends than in prior times of worry, thereby underpinning them. But I would need more evidence of a mental shift that way which would deter panics such as I vividly recall from 1973-74.

The problem with dividend-mindedness is that it has induced companies worldwide to shell out more than ever before, maybe more than they can afford. King Lodos makes the 'best of a bad lot' case for shares, given that even impaired payouts leave their payouts far ahead of low-yielding bonds and with more inherent inflation protection. It is a good argument, but one I have heard in the past on the eve of a collapse.

The trouble is that after a decade of joke interesr rates we are wandering in Terra Incognita with no map. There was never an investment environment in modern times so distorted.

I am an 'eternity' investor for equity income and never sell voluntarily, but most people are more apt to become dissatisfied when share prices tank, no matter how steady the divis. OTOH I am c. 15% in cash and am not prepared to commit it if the yield on UK shares might go from 3.5% to 5% before long.

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