BofAML: Bearish fundies point market higher

Via BofAML:

Tweeting the October Global FMS

#bottomline: Oct FMS shows investor sentiment bearish despite credit & equity rally; if trade war and BREXIT fears unrealized in Q4 then macro can beat expectations validating our contrarian bullish view.

#up-in-cash: FMS cash levels up to 5.0% from 4.7%, leaving BofAML Bull & Bear Indicator at an “extreme bear” level of 1.3.

#bearishmacro: FMS global growth expectations fall to -37%, i.e. low vs -60 to 80 range of past 25 years; record 9/10 say its “late-cycle”, record say “fiscal policy too restrictive”.

#greenshoots: 1-year high in FMS respondents saying companies should use cash to “increase capex”; and rising expectations for EPS, yield curve steepening and value outperforming growth; investor sentiment showing a few “green shoots”.

#tailrisks: 40% say trade war biggest tail risk vs 13% for monetary policy impotence and bond market bubble; 75% say “ending trade war” is most bullish catalyst for stocks in next 6 months, followed by German fiscal stimulus.

#crowdedtrades: FMS most crowded trade is “long US treasuries” (41%), then “long US tech/growth stocks” (24%); FMS says European govt bonds most overvalued asset class.

#longs&shorts: FMS investors (Chart 1) are long cash, REITs, staples, US, pharma (deflation plays), and short energy, UK, industrials, equities, sterling (inflation plays).

#extremes: FMS investors most overweight consumer staples since May’13, most UW materials since Feb’16, highlighting huge skew toward deflation not inflation plays.

#2020s: which equity market outperforms in next decade…FMS investors say EM 30%, US 22%, China 17%, EU 15%, Japan 6%, UK 3%; clear EM over EAFE preference.

#contrariantrades: Q4 rise in rates or growth is unanticipated…long stocks-short cash, long UK energy-short US REITs, short pharma-long industrials.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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