Cash kings prefer Europe
* Low risk appetite across regions and sectors
Globally, sentiment remains weak: global asset allocators are holding the highest average cash balance (5.7%) since Nov’ 01, while equity allocations have dropped to 4- year-lows. Cash allocations of European fund managers also remain elevated. Within equities, low conviction is also evident in regional and sector preferences.
* But consensus still pro-Europe
Regional allocations show Europe remains the most-preferred region (net 26% overweight), despite converging from extremes. Relative positive views are driven by growth optimism and the belief that ECB will stay the course of max-easing. Positioning implies that fund managers are hoping for mean-reversion on the European vs US equity market trade, which has made 60-year lows. However, the European Style Cycle continues to argue for staying out of Europe.
* UK stocks better placed for worse outcome
BREXIT is the biggest ‘tail risk’ by far, keeping the UK as the most underweighted equity market globally, and Sterling appearing the most undervalued it has been in the history of the survey. In case of an exit, UK large cap stocks should be relative winners given their higher Quality characteristics and low domestic exposure.
* Sector conviction too low to generate contrarian trades
This month sees no European sectors with extreme overweights (>30% net overweight) or underweights (<40% net UW), hence none of our contrarian signals are triggered. Broadly speaking, longs are focused on defensive themes with Telecoms, Healthcare, and Food & Bev most overweight. Banks remain the least-preferred.