Friday, May 29, 2009


No “Sell in May”

The bulls are back
Investors are now positioned for global economic recovery according to the May FMS. The unrelenting gloom of a mere three months ago has been replaced by fairly typical early-cyclical sentiment, with the only hint of potential irrational-exuberance in Emerging Markets. Real economic data now needs to satisfy consensus expectations but the May FMS does not say “Sell in May”.

Surging optimism on macro outlook and corporate profits
Optimism on global economic growth surged with a net 57% of panellists expecting a stronger economy- the highest reading since early-2004. And for the first time since March 2005, investors expect corporate profits to improve in the next 12 months, with over a quarter of respondents forecasting EPS growth to exceed 10%.

All regions seeing optimism (even Europe. . .)
Global growth optimism remains founded on China with two-thirds of investors expecting strength. However, even the final recessionary holdout has turned pro-growth with a net 35% of fund managers expecting Europe’s economy to improve, compared to a negative 26% last month.

Rising risk appetite but asset allocators hedge bets
The BAS-ML Risk & Liquidity composite jumped to the highest level since Nov 2007, with investors cutting cash balances to 4.3% (from 4.9% last month and a recent peak of 5.5%). However, asset allocators are still hedging their bets: they remain U/W equities (-6%) and have only marginally lowered cash O/W (+21% from +24%). A brief 9-month sojourn into bonds ended with allocators cutting to a net 3% U/W. They stay U/W Europe & Japan, but a record net 40% of investors see GEM as the region to O/W for the next 12 mths.

Defensives hacked back
Investors’ top 3 global sectors are now technology, energy and materials as May saw a rout in defensive sectors: pharma fell to -2% from +21%, staples -1% from +9%, and utilities -19% from -15% (now the most U/W global sector). The stubborn bank U/W was further reduced to its lowest level since June 2007.

What happens next?
Markets in H1 were all about extreme positioning & policy. With positioning now more balanced, markets in H2 will be driven by the economy & earnings. The FMS says the market grinds higher via asset allocation moves and pressure from the ongoing U/W in global banks. The grind lower risks revolve around weaker Chinese/EM data. Contrarian trades to mull over are long Europe/Japan, short EM/China; long pharma/utilities, short technology/materials.

To see full report: FUND MANAGER SURVEY