Global
Icarus takes flight1. FMS cash dips in Feb to 4.9% from 5.1%, but cash level high (10-year avg = 4.5%) & FMS Cash Rule still in "buy" territory. Our Bull & Bear indicator moves up to 6.3; we remain long stocks & commodities until "sell” signal triggered (B&B>8.0).
2. FMS shows macro optimism surging: 23% say "boom” (vs 1% one year ago) and 18% say “goldilocks” (vs 6% one year ago); meanwhile 15% say “stagflation” (a 3-month low) and while 43% expect “secular stagnation” this figure down sharply from 88% one year ago.
3. FMS ranks most likely bear market catalysts as follows: "protectionism" = 34%, "higher rates" = 28%, "financial event" = 18%, "weaker EPS" = 15%. FMS says best protectionist investment (and thus barometer of protectionist risk) = gold.
4. FMS says most "crowded" trade = long US dollar (= big reason US$ down YTD). FMS asset allocation & positioning (Exhibit 1) continue to reflect "up-in-$" expectations... longs in Japan, banks, tech. More hawkish Yellen at “Humphrey Hawkins” could provide upside catalyst for US$ given dovish market pricing of rate hikes. But Feb FMS shows consensus strong-$ view faltering at margin with rotation to EM (biggest MoM jump in 11 months), energy & materials (largest OWs since spring’12).
5. FMS says a contrarian macro bear (expecting weaker growth) would sell banks, US dollar, Japan, and buy bonds, utilities, staples. Meanwhile the contrarian macro bull (expecting higher inflation) would reduce cash, sell REITs, tech, and buy sterling, EM, industrials.
European
Global investors gradually more positive on Europe…The proportion of global asset allocators overweighting European equities increases to net 23% OW vs net 17% last month, now marginally above the long-run average. On a valuation basis, European stocks are seen as the second cheapest of all regions, with net 24% saying they are undervalued. In contrast, 78% believe US stocks are overvalued.
…but not so much for France - a contrarian opportunity
European politics makes a return as the top tail-risk to global markets. Sentiment towards French equities drops to its lowest level in almost two-years and France is now the least-preferred equity index in Europe (Chart 41). Our Style Cycle framework suggests French stocks should perform best under current macro conditions (see link).
European macro outlook is unambiguously bullish
Net 63% of European fund managers expect positive economic growth on a 12-month horizon; net 89% expect strengthening inflation and net 68% expect positive profit growth. European monetary conditions are seen as accommodative by net 55% of investors. The main reasons for optimism are global macro conditions and a pick-up in capex. In spite of this, European fund managers have raised their cash levels over the month, comfortably above the 10-year average level.
Consensus has conviction in long Tech/short Utilities
The biggest overweight reported by European fund managers is for Technology (net 32% are OW), while the biggest underweight is for Utilities (net 47% are UW). Both these sectors trigger our contrarian trading signal of avoiding sectors with >net 30% OW and buying sectors with >40% UW. Note that within Europe, Utilities have low
Quality Value characteristics and are not defensive. Aside from Technology, month-onmonth sentiment improved for Banks, Basic resources (strongest sentiment in two years) and Healthcare (the most-preferred defensive sector).