Market bullishness returned with a vengeance this month, according to Bank of America Merrill Lynch’s monthly fund manager survey. Yet some individual allocation experts remain cautious amid the prevailing economic and geopolitical uncertainty.

BAML's closely watched poll findings, released yesterday (November 12), indicated an overarching risk-on sentiment.

“The bulls are back,” said Michael Hartnett, the bank's chief investment strategist. “Investors are experiencing 'Fomo' – the fear of missing out – which has prompted a wave of optimism and jump in exposure to equities and cyclicals.”

Allocations to global equities shot up 20 percentage points month-on-month to a year-high net 21% overweight (the percentage that are overweight minus the percentage that are underweight).

And riskier stocks are in favour. There’s been heavy rotation into value (from growth) strategies, banks and Europe, and out of more defensive plays such as large-cap, utilities, staples and bonds.

Underlining this shift, cash levels fell from 5% last month to 4.2% in November, their biggest monthly drop since November 2016 and lowest point since June 2013.

Moreover, global growth expectations soared 43 percentage points to a net 6% of fund managers expecting growth to improve over the next 12 months. This was the biggest month-on-month jump on record (since 1994).

Inflation expectations are also sharply up. The number expecting the consumer price index to rise in the next 12 months surged 27 percentage points to a net 31% – though this is still well below highs in the latest cycle.

Scott Lothian

LINGERING FEARS

All this being said, various worries are playing on investors’ minds. The trade war is still considered by far the biggest tail risk, cited by 39% of respondents, while fears have risen about a potential bond market bubble, the second most mentioned tail risk.

That may help explain the cautious approach in some quarters, especially given the elevated prices of stocks and other assets in many markets.

Scott Lothian, a multi-asset portfolio manager at UK fund house Baillie Gifford, said the funds he allocates for retain “slightly above-average cash levels” of around 12%. That figure has ranged from 1% to 20% in the past decade.

“In times of heightened uncertainty and expensive asset markets, an allocation to cash is very useful for portfolios targeting stable growth outcomes,” Edinburgh-based Lothian told AsianInvestor.

While he points out that the value of cash will be eroded by inflation and cash returns will be below funds’ targets, the funds’ current level reflects concern about historically high valuations. 

“There could well be price declines in the near term,” Lothian said. “Our cash holdings today allow us to add quickly in those cases. An example was late last year, when we bought equity with cash after the sharp market decline.”

ASSET OWNER APPROACH

Pension funds certainly have no qualms about building up cash exposure at times such as this.

Korea’s Public Officials Benefit Association, for instance, has maintained a relatively high cash level since last year, given the late stage of the market cycle. And it is likely to retain its current position in the coming months, chief investment officer Jang Dong-hun told AsianInvestor last week. The fund requires more liquidity to cope with the need to hedge its foreign exchange exposure, he added.

Jean-Louis Nakamura

Some wealth managers, too, are not averse to cash levels rising when necessary, at least in lower-risk strategies. 

Jean-Louis Nakamura, Asia-Pacific chief investment officer of Swiss private bank Lombard Odier, told AsianInvestor: “We briefly raised our cash holdings to a significant level – above 30% – in early July in our discretionary conservative portfolios."

This was the result of a systematic process that automatically shifts assets into cash when market volatility pushes the portfolios beyond their risk budgets, Hong Kong-based Nakamura added.

But the bank's concerns have since eased. Since the end of the summer, the bank has reduced the cash portion to more like its long-term level of 5% for the discretionary conservative portfolios.

“As this process is systematic, we would not rule out an increase in cash in the near future, should the observed risk in markets surge again,” Nakamura said.

However, Lombard Odier would not raise cash exposure in its balanced or growth discretionary portfolios, nor something it usually recommends in its advisory portfolios.

Nakamura gave two reasons for this. Firstly, timing markets by cutting exposure to risky assets represents an opportunity cost that might prove substantial in the long-term.

Secondly, when risk budgets are higher, he said, it is easier to stay within their limits, provided one’s allocation is properly diversified.

BAML conducted its November global fund manager survey from November 1-7, polling 230 respondents with $700 billion under management in total.