* July FMS investment conclusion
July FMS cash levels remain stubbornly high at 4.5% driven by (as yet unrealized) fears of inflation/interest rates, geopolitics & valuation. But investor sentiment is beginning to “melt-up”: equity allocation hit their 2nd highest level in 13 years. The summer “melt-up” is likely to be followed by an autumn correction.
* Inflation, tail risks & crowded trades
Global growth expectations stable but big jump in China growth optimism; more than 7/10 now expect inflation and short-term rates to rise next 12 months; biggest tail risks = geopolitics & China debt defaults; most "crowded trade" = US High Yield (taking over from EU periphery debt).
* FX & equity valuation extremes
Investors say US dollar the cheapest in 10 years, British pound most expensive since Lehman collapse; stocks most expensive since May 2000! July rotation from telecoms, pharma, Eurozone to tech, banks, Japan, and investors close 18-month UW of materials. But overall positions (Chart 1) far less extreme than 6 months ago.
* July FMS contrarian trades
Based solely on sentiment extremes within the July FMS four contrarian pair trades stand out for coming weeks: long bonds-short stocks, long US dollar-short sterling, long telcos-short energy, long Emerging Markets-short Eurozone.