Stocktake: High cash levels belie market calm

Investors are holding more cash than at any time since the Lehman panic in December 2008, according to Merrill Lynch’s latest monthly fund manager survey, while the percentage of investors buying protection against near-term equity declines is at a seven- year high.

That might suggest panic over the well-publicised woes in Greece and China, but a closer look at the survey confirms otherwise. Equity allocations actually rose last month and are slightly above normal.

More pertinently, investors are overweight riskier sectors such as banks and technology and shying away from defensive sectors. In fact, a record percentage of investors are overweight financial stocks – not the kind of move you make if you think Armageddon is nigh.

We noted last week there has been no great rush into supposed safe-haven assets such as gold, the Swiss franc and German bonds, indicating a distinct lack of panic among investors. Merrill’s findings confirm this view. Investors raised cash as they expected a market wobble but did so by selling emerging markets, commodities and bonds rather than by exiting cyclical stocks.

With the survey undertaken prior to last week’s sharp global equity rally, much of that cash is likely to have been put to work already. Far from panicking, it seems investors were waiting to pounce.

European bull market resumes

European equities have soared since Greek tensions faded. Is it a temporary relief rally catalysed by investors’ worst fears not being realised, or merely a resumption of the underlying bullish trend?

The latter view makes more sense. Although Merrill’s survey shows allocations to European equities hit six-month lows in July, investors were never truly spooked.

Allocations to Europe remain well above normal; Europe remains the most popular region among fund managers; investors expect to further overweight Europe over time; almost all expect greater earnings growth over the next year; and most expect double-digit profits growth.

“Despite the Greek newsflow, intention to own European assets is high and rising,” said Merrill, noting Europe had “sailed through the global risk aversion”.

Investors should not have been surprised. Indices throughout Europe broke out to new highs in the early months of this year, with the Euro Stoxx 50 rising by more than 25 per cent off its January low. Equities are always vulnerable to retreat after runs of that magnitude, but such momentum also indicated a bullishness that does not vanish overnight, especially when the fundamental and valuation backdrop remained largely supportive.

There will be more pullbacks – Grexit fears are unlikely to disappear – but market action continues to suggest buying any European dips.

US equities continue to sleep

Even the recent commotion regarding woes in Greece and China was not enough to wake the US equity market from its slumber.

Yes, there was some volatility, but 2015’s narrow trading range remains intact. Bespoke Investment Group notes that not once in 2015 has the S&P 500’s year-to-date performance varied by more than 3.5 per cent from where it began the year. That’s not just rare, it’s unprecedented – prior to 2015, notes Bespoke, there was never a year where such a narrow range persisted for such a long period.

It’s not an ideal environment for traders, but it does at least have the virtue of predictability – buying near the bottom of the range and selling near the top continues to be the obvious trade.

Trump trumpets stock picks

Donald Trump, it appears, is quite the stock-picker.

Last week, his presidential campaign team released a list of 45 stocks sold by Trump in January 2014.

“Even though stock market purchases are not something that Mr Trump has focused on in the past,” 40 stocks “went up in a relatively short period of time”, allowing him to book $27 million in profit and to make an overall gain of 40 per cent.

What a winner! Well, not really. No purchase date was given, so we don’t know if he actually beat benchmark indices such as the S&P 500, which rose 32 per cent in 2013 alone.

The point isn’t that Trump is a blowhard (he is, but that’s hardly news). It’s that amateur investors who dabble in stocks often ignore the overall market trend, resulting in dangerous delusions of grandeur. To cite an old market adage, never confuse brains with a bull market.