This is a Video Guest Post by AK of Fallible
AK has been an analyst at long/short equity investment firms, global macro funds, and corporate economics departments. He co-founded Macro Ops and is the host of Fallible.
In this video we’ll review whether a stock market crash is coming and whether the bear market is here.
The latest BofAML Fund Manager Survey is out and provides an interesting look into just pessimistic asset managers remain. The most important takeaways in my opinion are the strong overweighting to cash and now crowded positioning in emerging markets.
The allocation to cash is now at its highest level since Jan 09’. I keep saying this but again this is not how long-term market tops are formed. For a significant bear market and/or market crash you need to have excessive risk taking and over-positioning (ie, use of leverage) leading to investors getting over their skis.
According to BoFAML, the US saw record equity outflows over the past 3-months totaling $82bn, equivalent to 2% of AUM. This is consistent with “US equity bearishness at ‘events’ & ‘big lows’ of past decade”.
That capital has rotated out of the US and into emerging markets. Cumulative EM bond and equity inflows are now just $2bn from all-time highs (see chart to the right).
This sets us up with rather strange positioning amongst fund managers. They’re defensive, holding lots of cash and little equities (see chart below), yet they’re holding large relative amounts of EM debt and equities (presumably because they believe them to be cheap).
Despite this dissonance in risk-off high cash levels and risk-on large EM positioning the survey shows that investors are nearing significant overweight levels in EM relative to US positioning (where holdings are at 9-month lows). This means that fund manager positioning is now a headwind for EM and a tailwind for US markets.
For more, make sure to sure to watch the video above!
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