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Cash & Carry Summary

Core Content

The document provides an analysis of the Global Fund Manager Survey (FMS) from May 2014, focusing on investor sentiment, positioning, and market expectations. It outlines the current state of the equity market, cash levels, and asset allocation trends, with a particular emphasis on contrarian trading opportunities.

Main Points

• Equity Bull Market: The current equity bull market is expected to become the third longest in history within 12 months (April 2015). The May 2014 FMS does not suggest an imminent end to the bull market, except for potential risks like a geopolitical crisis or a China debt default.

• Cash Levels: Average cash levels rose to 5.0% from 4.6%, surpassing the FMS "buy" level of 4.5%. This indicates a contrarian signal for equities. Over the past 11 months, cash levels have remained above 4.4%, while the S&P 500 has increased from 1650 to 1875.

• Investor Fear & Risk Taking: Investor "fear" is at its highest since October 2012, with a below-average portfolio risk. This suggests that the path of least resistance is upward in stocks and credit, and downward in volatility.

• Rotation to Cash, Income & Carry: In 2014, investors rotated from stocks to cash, from Japan/US to Eurozone, and from banks/tech to high-yielding utilities, energy, and telecom. This rotation helped to anesthetize performance pain.

• Recovery Optimism: Despite low expectations of a "boom," 76% of investors believe growth will improve, and 79% expect bond yields to rise over the next 12 months.

• Contrarian Trades: The document recommends contrarian trades such as long telcos, short utilities; long Japan, short Europe; and long risk, short cash.

Key Information

FMS Cash Rule

• When average cash balance rises above 4.5%, it signals a contrarian buy for equities.
• When the cash balance falls below 3.5%, it signals a contrarian sell.

Risk & Liquidity Composite Indicator

• Fell to the lowest level since October 2012 (39), indicating a reduced risk appetite.

Hedge Fund Net Equity Exposure

• Dipped to 29%, the lowest since June 2012.

Asset Allocation Trends

• Equities: Net allocation fell to 37% OW from 45% OW in April. The "Longs" remain in stocks, cyclicals, and developed markets (DM).
• Bonds: Allocation remained unchanged at 55% UW.
• Commodities: Allocation remained a large UW at 18%, despite strong global growth expectations.
• US Equities: Allocation declined to 6% OW from 12% OW in April, but remains 0.8stdev below its 10-year average.
• Eurozone Equities: Allocation increased to 36% OW, the highest in May.
• GEM Equities: Global investors reduced their UW position, and the region is now seen as a potential overweight in the next 12 months.

Sector Allocation

• Energy: Improved to 6% OW, the highest since November 2012.
• Utilities: Improved to 21% UW, the most optimistic since July 2012.
• Tech: Fell to 30% OW from 39% OW in April, now only 0.5stdev above its 10-year average.
• Banks: Fell to 3% OW, the lowest since July 2013, but remains 0.9stdev above its 10-year average.
• Telcos: The contrarian trade of the month, with a 1.6stdev extreme in relative positioning.

Regional Preferences

• Japan: Net UW at 7%, the lowest since February 2013.
• UK: Net UW at 1%, continuing a trend of underweight positions.
• GEM/Asia: Expected to be overweighted in the next 12 months for the first time in a year.

Survey Demographics

• Total Respondents: 170 for Global FMS questions, with a total AUM of $455bn.
• Investor Types: Institutional funds (64%), Hedge funds (23%), Mutual funds (56%), and others (27%).
• Investment Time Horizon: Weighted average of 7 months.

Summary of Changes

• Macro Views: Resilient global growth and profit expectations, with a focus on more capex spending.
• Investor Positioning: Rotation from stocks to cash, from Japan/US to Eurozone, and from banks/tech to utilities, energy, and telecom.
• Growth Expectations: Global real economy growth is expected to improve, but Chinese growth expectations dropped to -44% from -34%.

Conclusion

The May 2014 FMS indicates a continued bull market in equities, with investors rotating into cash, income, and carry trades. The survey highlights a cautious outlook, with a focus on recovery and growth, and suggests that contrarian trades in telcos, Japan, and risk may offer potential opportunities. The overall sentiment remains optimistic, but with a delay in higher growth and yields, investors are advised to adjust their positions accordingly.