 "MF cash sloshes around IPOs, too")
Global brokerages and research houses seems to be turning bearish on the road ahead for equities as an asset class with analysts at Goldman Sachs, too, sounding alarm bells given the lofty valuations and slowing economic growth.
While remaining overweight on cash from a three-month horizon, it also believes the market’s dovish pricing of the US Federal Reserve (US Fed) increases rate shock risk, in which case both equity and bonds could sell off.
“We downgrade equities to neutral over 12 months on growth and valuation concerns. Until we see sustained earnings growth, equities do not look attractive, especially on a risk-adjusted basis. We expect particularly poor returns in dollar terms, with our forecast of a stronger dollar and the prospect of less negative equity/FX correlations. We remain overweight cash on a three – month basis, as we see potential for higher cross-asset volatility,” point out analysts at Goldman Sachs led by Christian Mueller-Glissmann in a recent report.
US Federal Reserve's (US Fed's) minutes of the April policy meeting released on Wednesday hinted at a possible rate hike in June. The central bank has raised rates for the first time in nearly a decade in December 2015.
Goldman is also not convinced that the rally in emerging markets (EM) is sustainable, which could weigh on commodities, in particular metals.“China growth concerns could also come back into focus, as we think the support from policy will fade during 2H2016. Finally, we continue to see elevated European political risk with uncertainty around the UK’s upcoming EU referendum,” Goldman Sachs says.
However, they now expect less downside to oil over three months, given supply disruptions, and upgrade commodities to neutral. Their key overweight remains credit, where valuations and fundamentals appear supportive.
Recently, a recent BofA-ML fund manager survey for May that saw a participation of 205 panellists with $619 billion assets under management (AUM) also suggested that uncertainty surrounding Brexit and economic growth in China has seen fund managers across the globe hike cash levels in their portfolios.
“Although global growth expectations rose slightly from the previous month, investors continue to hold elevated cash levels to protect against potential shocks from Brexit, China and quantitative failure,” said Michael Hartnett, chief investment strategist at BofA-ML in a report.
According to the survey, 27 per cent of the respondents feel Brexit is the biggest tail risk by far, followed by China devaluation and defaults (21 per cent).
Chinese growth expectations, according to the survey, fell sharply with a net 50 per cent of investors expecting a weaker economy, up from 22 per cent in April.
“If you go down to the woods today, it will be full of bears. Investors positioned for ‘summer of shocks’. Fund manager survey cash levels are up from 5.4 per cent to a high 5.5 per cent with only 12 per cent taking ‘higher-than-normal’ risk,” the survey says.
