Investor caution hits two-year highs

The recent pullback in global equities has been a relatively modest affair, but Merrill Lynch’s latest monthly fund manager survey indicates investors are more spooked than at any time over the last two years.

Geopolitical tensions have catalysed a flight from risk, with a net 27 per cent of professionals now overweight in cash, up from 12 per cent in July, and cash accounting for 5.1 per cent of global portfolios.

Both readings are the highest since June 2012, while the number of investors hedging against sharp equity falls is at its highest since the dark days of October 2008.

Furthermore, a net 48 per cent of investors prefer value stocks to growth, trumping the previous record set in 2009.

Wrong-footed managershave only themselves to blame. The previous month the number of investors saying equities were overvalued reached its highest level since 2000.

Despite that a net 61 per cent were overweight in stocks, the second-highest reading in history.

The surveys are probably best viewed in a contrarian light.

Just as July’s positioning indicated stocks were vulnerable, August’s survey suggests the worst of the equity decline is already over.

Bull markets climb a wall of worry – high cash readings and cautious positioning indicates the global rally has paused, not ceased. Ordinary investors wary Retail investors, too, are skittish, according to American Association of Individual Investors (AAII) surveys. Bearish sentiment has spiked, recently hitting its highest level in a year.

Additionally, bears have outnumbered bulls for three consecutive weeks, something last seen in May 2013.

Some might point to different signals emerging from other AAII surveys.

In July, for example, ordinary investors’ cash levels hit their lowest level since 1999.

Equity allocations have been above historical norms for 18 of the last 19 months, July’s weighting marking the second-highest reading since 2009.

However, equity allocations were much higher at the market peak in 2000, and topped current levels many times between 204 and 2007.

Furthermore, bullish sentiment has been muted throughout the last year, never reaching the fevered levels of past rallies.

Ordinary investors have been reluctant bulls throughout the current cycle.

The recent spike in bearish sentiment suggests they remain cautious, with none of the irrational exuberance that marked a number of past peaks.

Investors urged to avoid Irish Irish equities may deliver poorer future returns than any other developed market in the world, warns Swiss firm Wellershoff & Partners.

In its annual update on global valuations, Wellershoff uses a cyclically adjusted price-earnings (Cape) ratio to estimate likely returns over the next five years.

Ireland’s Cape is not especially high, but begins to look pricey when one takes into account macroeconomic conditions, it says, meaning slight losses are likely over the next five years. Of 38 countries analysed, only the Philippines ranks below Ireland.

The US also does poorly, according to the Swiss analysis.

With a Cape ratio “about a third higher than its current rates of interest, inflation and GDP growth can justify”, there is an “alarmingly high” risk of “significant” losses.

The euro zone fares better, with particularly good returns forecasted for France, Italy and Spain. Wellershoff's paper is at http://iti.ms/1rdpOce. Reasonable is the new cheap The recent pullback has differed from other declines seen in recent years.

Firstly, not all supposed safe-haven assets have flourished, with gold stagnating and several defensive sectors, such as utilities and telecommunications, struggling.

Secondly, as Blackrock's Russ Koesterich (pictured) notes, some higher-risk parts of the market, such as emerging market stocks in Asia, have done just fine.

This is not the risk-on/risk-off behaviour of recent years.

To Koesterich, it reveals a “new-found interest in value”, with investors increasingly tempted by emerging markets trading at a 30 per cent discount to developed indices.

Now, unlike earlier this year, emerging markets are no screaming bargain.

Indeed, many argue no region in the world is particularly cheap, relative to history.

However, major assets everywhere are either fully valued or expensive, says Koesterich, forcing investors to broaden their horizons.

“Put differently: in a world where most investments look expensive, reasonable is the new cheap.”

New index bets on women What if it had been Lehman Sisters instead of Lehman Brothers?

Investors favouring the former might like a new exchange-traded note issued by Barclays based on its Women in Leadership Total Return Index.

The index tracks US-listed firms with a female chief executive or those companies with at least 25 per cent female members on its board of directors.

It may do well – women-run hedge funds have outperformed in recent years, as have companies with women on their boards.

Barclays itself doesn’t make the list, and that’s not just because it’s a UK bank – ironically, it doesn’t meet its own gender criteria.