A survey of the world’s fund management industry showed that investors were at the most bullish about equity markets for over 13 years in July but retained “stubbornly” high holdings of cash amid lingering uncertainties.

A survey of the world’s fund management industry showed that investors were at the most bullish about equity markets for over 13 years in July but retained “stubbornly” high holdings of cash amid lingering uncertainties.

July cash levels remain unchanged from last month, standing at 4.5 per cent, while in general, optimism about equity markets improved, according to a monthly survey by Bank of America Merrill Lynch. The poll covered 228 panellists together overseeing $674 billion of assets.

The survey showed that fears of inflation/interest rates, geopolitical risks - such as the Israel/Palestine clash and events in Ukraine - and valuation encouraged investors to keep cash levels at a relative high level, although cash holdings have gone down from 5 per cent in May. The survey was carried out between 3 and 10 July.  

An issue that has perplexed – and also unnerved some commentators – is how certain measures of market nervousness, such as the US “VIX” measure of volatility, has traded at the lowest level since before the 2008 financial crash. It is feared that a rise in global interest rates, which is inevitable at some point, could trigger a rebound in volatility. An issue for the wealth management industry is how clients need to be positioned ahead of any such rise in market turbulence.

Although stocks are seen as most expensive since May 2000, equity allocation hit their second highest level in 13 years. The summer “melt up” is likely to be followed by an autumn correction, according to the bank.

Some 61 per cent of global asset allocators are overweight equities, ranking as the surveys highest reading on this measure since early 2011 and represents the panel’s second strongest response ever. This positioning for recovery reflects an increase in investors’ inflation expectations, where expectations jumped to its highest level at 71 per cent since March 2011.

 “Improving investor sentiment on global growth, inflation, equities and risk-taking are all testament to a potential normalisation of rates. If growth does pick up, volatility will pick up too,” Michael Hartnett, chief investment strategist at BoA Merrill Lynch, said.

Geographically speaking
Among respondents of the global survey, results showed the intention to own European equities on a 12-month view had dropped in July to the lowest level for 13 months because investors are not so upbeat about the prospects for company earnings, and less happy with valuations. Investors’ views on economic growth, inflation prospects and profits have also moderated compared with where they were in June.

Respondents to the European segment of the poll showed that 64 per cent of respondents expect quantitative easing from the European Central Bank, with most expecting QE in the fourth quarter of this year, but with a substantial number thinking this will happen in 2015.

In other regions, the global survey showed no change in the view on US equities – a net 10 per cent of respondents said they were overweight US stocks in July. As far as Japan is concerned, a net 26 per cent of investors are overweight – the highest position in five months. A net 35 per cent were overweight of the eurozone stock market, down from 43 per cent. As for emerging markets, the net overweight stance of 5 per cent is unchanged from June.  

Investors also see two major risks to market stability. Above a quarter of the global panel believe that the risk of Chinese debt defaults and geopolitical crisis both equally pose the largest tail risks, the survey showed.

Investors’ appetite for exposure to the eurozone periphery, such as Spain and Italy, is declining.

The survey also noted that the US dollar is seen by investors as being at the cheapest levels for 10 years, while the British pound sterling is at the most expensive level since the collapse of Lehman Brothers in 2008.