"We remain a seller of risk," says the bank's Michael Hartnett, commenting on BAML's latest weekly flows report. The "Bull & Bear" index moved higher to 4.1 this week, up sharply from the March low of 0.1, and the most bullish since June of 2015.
Equity funds posted a net inflow of $4.3B, including a $5.4B inflow into U.S. equities (European funds had net outflows of $900M). It was the first overall net inflow in three weeks.
Also seeing strong investor interest were inflation-linked bond funds (biggest inflow in nearly one year), and emerging market bond funds (largest in almost two years).
"This is when we find out if hedge funds really hedge," says BlackRock's Ewen Cameron Watt, musing on the impact of coming rate hikes. “Some of us feel like the informed citizens of Pompeii around 79 AD: we are grateful for the lovely sea views but worry about the volcano in the background.”
Watt takes note of rising correlations this year, with the global bond market "trading as one," and being matched by moves in equities. This also impacts real estate, credit markets, and commodities, he says.
BlackRock sees correlations rising even further as the Fed hikes, with the chance of both bonds and stocks heading south at the same time (not a common event since the "Greenspan put" came into being).
According to the 2015 Legg Mason Global Investor Survey, 85% of affluent U.S. investors say U.S. stocks offer the best opportunities over the coming 12 months - that's up from 74% who said so in 2014.
63% are maintaining their equity allocation, 32% expect to boost it, and just 6% plan to cut equity exposure.
Global Head of Marketing Matthew Schiffman: "Overconfidence can lead to a degree of complacency that could prevent investors from paying close attention to their overall financial plan ... Investors have not changed their asset allocation since we started measuring investor sentiment three years ago, which could be another sign of complacency creep."
Sixty-seven percent of those surveyed expect difficulty over the next three years thanks to rising interest rates, according to Natixis' survey of 642 institutional investors collectively managing $31T in assets.
With rates (presumably) on the rise, the top three ways those surveyed intend to position their portfolios are 1) Shorten duration (61%) 2) Cut exposure to fixed-income (46%) 3) Increase use of alternative strategies (36%).
Predicting which asset class will be strongest in 2015, equities - particularly those in the U.S. - win out with 46%. Another 28% see alternative assets as the place to be, while just 13% expect bonds to put in another great performance, 7% real estate, 3% energy, and 2% cash.
Just 32% of fund managers expect the global economy to strengthen over the next twelve months, according to the latest BAML Fund Manager Survey. It's the weakest showing in two years. Alongside, corporate earnings expectations are the poorest in 18 months.
As a result, money managers have slashed overweight equity allocations to a two-year low of 34%, cut emerging market exposure for the first time in five years, boosted fixed-income holdings, gotten more underweight commodities, and raised cash levels to 4.9%.
“Cash balances are high, but investors are retreating to benchmark positions rather than staging an exodus from markets,” says BAML's top market honcho Michael Hartnett.
With interest rates scraping zero across the developed world, just 18% of those surveyed believe monetary policy is too stimulative. Yikes!
Global asset allocators are a net 61% overweight equities, according to the latest read from BAML, the highest amount since early 2011 and the second-strongest response in the report's history. Overlooked apparently, are valuations, with a net 21% of fund managers viewing stocks as overvalued, the highest read since 2000.
"Improving investor sentiment on global growth, inflation, equities and risk-taking are all testament to a potential macro normalization in the second half," says BAML Chief Investment Strategist Michael Hartnett. "This could eventually feed into a normalization of rates. If growth does pick up, volatility will rise too."
You need to look at more than the size of flows, says Deutsche's Sebastian Mercado, who instead relies on what he calls "flow trend formation." For example, noting that ETFs attracted $25B in a month is of little use, but a pattern of $1B of inflows every day for a month is a sign of a demand shift for that asset class.
The bank is now publishing a Tactical Asset Allocation Relative Strength Signal report, and the latest one sees strong equity flows across all regions, particularly Europe and North America, more particularly still in periphery states like Spain (EWP) and Italy (EWI). Treasury and corporate bond flows are negative and the rally in gold has failed to attract much in the way of inflows into those ETFs.