Earlier Tuesday, we brought you some highlights from the latest edition of BofAML’s popular Global Fund Manager survey.
The February installment shows respondents are reluctant to buy into the rally, despite the best start to a year for equities since 1987. In fact, equity allocations in the survey have fallen to one of their lowest levels since the crisis, while cash allocations are at the highest since 2009.
Those points are easily the most interesting highlights from this month’s FMS, but market participants invariably key on the “most crowded trade” and “biggest tail risks” charts.
Make no mistake, there’s a reason why people pay attention when the bank’s Michael Hartnett reveals what his survey says about crowded trades. 13 months ago (so, in January 2018), the survey flagged “short vol.” as the most crowded trade on the planet. Two weeks later, global equities careened into correction territory and the short VIX ETPs blew up, leading the Seth Golden crowd to ponder the depressing prospect of going back to a life spent making the cigarette break schedules at the local Target.
Subsequently, Hartnett would warn that “long FAANG” had replaced “short vol.” as the most crowded trade on Earth (primarily because the short VIX ETP massacre cleared the deck). That too proved prescient as tech would promptly stumble on regulatory concerns in late March on the way to falling apart completely in Q4.
In December,”long FAANG+BAT” was finally dethroned as the most crowded trade, primarily because by the end of November, the losses for popular Tech and Growth longs were horrendous, forcing even the most ardent bulls to adopt a capitulatory lean. Taking the top spot in the December survey was “long USD”, and it retained its perch in January.
Well, in the February edition, there’s a new “most crowded” in town.
For the first time in survey history, “long EM” takes the top spot, marking a rather stark turn of events, considering “long USD” (in many ways the antithesis of “long EM”) had worn the crown for two months in a row.
Here’s BofAML’s Hartnett:
“Long EM” is the most crowded trade for the first time on record, marking a major reversal from short EM as #3 crowded trade last month; replaces #2 “Long USD” and “Long FAANG+BAT” (Facebook, Amazon, Apple, Netflix, Google + Baidu, Alibaba, Tencent) falls to #3; note conviction on crowded trade now the lowest on record.
As noted, there’s not a lot of conviction there, but the fact that “long EM” even made it onto the list is notable. Hartnett contends this shows a “hardening” of conviction in the secular stagnation theme. Considering the survey was conducted from February 1 through February 7, one imagines it’s also influenced by the Fed’s dovish pivot which probably helped knock the dollar out of the top slot.
Amusingly, the dollar is now riding the best winning streak in years and the EM index had fallen for four consecutive sessions headed into Tuesday, after surging with other risk assets to start 2019.
As a reminder, at least some analysts have advised caution on EM on the heels of the bounce.
Read more on the outlook for emerging markets
Finally, “trade war” remains the biggest tail risk in BofAML’s survey for the ninth consecutive month and the eleventh month in twelve.
Of course “trade war” is just a proxy for “Trump’s policies” so congratulations to the US President for retaining the top slot on the list of things large allocators of capital are concerned about.