BAML survey and fund managers
BAML (Bank of America Merrill Lynch) conducted a survey that questioned 235 global investors with $684 billion in assets under management from June 1–7. According to the survey, global fund managers turned overweight on the United States for the first time in 15 months.
The allocation to US stocks rose 16 percentage points over June to net 1% overweight. Fund managers have moved out of emerging markets (EEM) and the Eurozone (HEDJ) since the profit outlook for the United States has hit a 17-year high. Two-thirds of the survey respondents mentioned that corporate America was in the best position it has been for the past 17 years.
Decoupling remains the theme
Last year, strength in US equity markets (SPY) (DIA) was seen as a precursor to strength in the global markets. A decoupling theme has taken over the markets in 2018. Weaknesses in emerging markets and the Eurozone are in contrast to the positive sentiment in the US market. The Nasdaq Composite (QQQ) and the Russell 2000 (RUT) (IWM) are hitting all-time highs.
BAML said, “June rotation shows investors are selling cyclical plays (such as) banks, emerging markets and euro zone equities in favor of defensive sectors and U.S. equities.” The shift from cyclical to defensive is most likely due to concerns over inflation and a possible trade war. The allocation to commodities rose to a new eight-year high with net 7% overweight. That’s the highest since April 2012.
Outlook bright for equities, but what about gold?
On the other hand, a record 42% of respondents felt that corporations are overleveraged, which could mean downside risks for equities compared to government bonds. According to the weighted average of survey responses, investors expect the S&P 500 (SPY) to peak at 3,040, which implies an upside of ~9% from the current level.
Since the overall market sentiment regarding US markets is currently positive, gold (GLD) and other safe-haven investments are not likely to attract bids. In the absence of any major catalysts, gold prices are thus expected to trade sideways, as they’ve been trading over the last few weeks.