* Bottom Line
Bearish sentiment helps explain gutsy resilience of stocks to Greece, China, Fed and HY. FMS cash levels remain high + Fed hike priced-in = new stock market highs/risk rally before Sept hike. Late-summer pain trade = rally in EM, energy & commodities with US$ “crowded” & “overvalued.” By contrast, banks most at risk if recession fears grow.
* China recession / EM debt crisis = biggest "tail risks"…
...according to 2 out of 3 investors. Global growth, inflation & bond yield expectations down sharp in August FMS. But just 6% see global recession, GDP forecasts for US (2.4%) & China (6.5%) stable and majority expect Fed to hike in September.
* Cash high @ 5.2%, record UW of commodities
Cash down from post-Lehman 5.5% July peak but still high. Investors stay long stocks, long cash, & short bonds. Investors “aggressively” UW commodities at record high.
* Record UW of EM
Investors long “strong-US$” markets (Eurozone & Japan – Chart 1), short “rate-hike” markets (US & UK). Yen most “undervalued” since Oct ’08; sterling most “overvalued” since Nov ’08. All-time high UW of EM, higher than during China debt scare (Mar’14), Lehman (Dec’08) & Lula (Oct’01).
* Record UW of Energy
Sector allocation remains biased to US-led “deflationary recovery” view (S5HOME at new cyclical highs). In Aug investors reduce banks & tech, take energy sector weighting to all-time low, rotate to telecoms (3-year high), utilities, healthcare (2-year high).
* Contrarian Trades
August trades: long EM, short DM; long commodities, short cash; long energy, short utilities/telcos; July trades: long energy/EM/commodities, short banks/Japan/cash wrong; long staples, short discretionary, long large-cap, short small-cap worked well.