Money managers more cautious after March rally

The finding is part of a survey of fund managers conducted by Bank of America Merrill Lynch

Money managers have increased cash levels following last month’s sharp rally, according to a survey of fund managers conducted by Bank of America Merrill Lynch (BofA-ML). The investment bank says the conviction levels among fund managers is the lowest in 18 months, over fear of “quantitative failure”.

“With valuations for bonds and equities at their seventh highest reading in 13 years, investors might be turning to cash to protect against the downside, while shunning risk assets where valuations constrain the upside. Range-based trading is likely to continue,” said Michael Hartnett, chief investment strategist at BofA-ML.

According to the survey, cash levels rose to 5.4 per cent in April from 5.1 per cent in March. The survey, conducted between April 1 and 7, saw participation of 200 fund managers, who together manage assets worth $596 billion.

Another finding of was that expectations on economic growth and earnings are low. Eighty-two per cent of the respondents believe recession would be unlikely. Also, nearly 54 per cent of the respondent say there will be two rounds of interest rate hike by the US Federal Reserve this year, 27 per cent said one hike and nine per cent said three.

The key risks highlighted  were quantitative failure; ‘Brexit’ (Britain’s exit from the European Union); and fears of US recession, China devaluation, and emerging market default.

“Global investors highlight quantitative failure as the biggest tail-risk, followed closely by Brexit. However, despite significant convergence in previously extreme regional preferences, Europe remains the most attractive region globally,” said Manish Kabra, European equity and quantitative strategist at BofA-ML.

According to the survey, the most common trades among global investors are going long on the US dollar, followed by shorting emerging markets, and going long on ‘quality stocks’.

As far as regional preferences go, Japan and banks in Europe had the biggest underweight.