Surge in investors buying protection against market fall: BofA-ML survey

The share of investors buying protection against a correction in the equity markets has seen the largest monthly increase in 14 months, says a survey of Bank of America Merrill Lynch (BofA-ML) survey of global fund managers. In September, there was a nine percentage point increase in equity hedging and only a net 24 per cent of those polled hadn’t bought protection against a fall in the equity markets.

The optimism over global growth continued to decline, with 25 per cent of investors expecting a stronger economy in the next 12 months, as compared to 62 per cent at the beginning of the year, the survey said. 

The BofA-ML polled over 200 money managers handling $630 billion in assets during early September.

A key finding of the survey was the cash levels at funds remained above historical levels, which could insulate the market from a sharp fall.

“Average cash balance continues to be a key element preventing a sell signal, dipping to 4.8 per cent in September but still above the past 10-year average of 4.5 per cent,” BofA-ML said.

High equity valuation won’t look euphoric until cash levels start to drop, it said.

For most global fund managers, the geopolitical risk remained the biggest tailwind. Around 34 per cent of those surveyed said the biggest risk to markets was North Korea; a policy mistake by the US Federal Reserve/European Central Bank (21 per cent) and Chinese credit tightening (15 per cent).

Over half the fund managers surveyed said they would be most surprised to see the world economy slip into recession in the next six months. A net 30 per cent said an equity bubble could be the least surprising event.

Allocation to emerging markets equities rose to net 47 per cent overweight. Investors have not been this underweight to the US when compared to emerging markets since December 2007, the study said.