Investors couldn’t whistle past the graveyard of European stocks forever.
True, the market remains near all-time highs, but it’s stumbled of late, reacting to global events that it easily ignored at the start of summer. That has large investors going to cash at rates not seen for two years.
Indeed, 27% of fund managers surveyed are overweight cash in August, up from 12% last month, according to the latest Bank of America Merrill Lynch fund manager survey. Cash now accounts for an average of 5.1% of global portfolios, up from 4.5% in July, BofA Merrill Lynch says. Both cash readings are at their highest since June 2012.
As Michael Hartnett, chief investment strategist at BofA Merrill Lynch Research, says in the report:
“The market melt-up is over, or at least on pause, as investors seek refuge while they digest world events and the prospect of higher rates.”
Rebalancing Away From Europe
Much of the rebalancing toward cash is being driven by moving to underweight on Europe. The crisis with Russia and Ukraine is hurting sentiment and damaging already fragile economies throughout the region. From the BofA ML report:
“Europe’s status as the world’s market darling for much of 2014 has all but evaporated in the past month, with a big negative swing in the number of investors currently overweight European equities and an even greater negative swing in sentiment about the future.”
With no end in sight to the Russia crisis — and daily reminders that European economies are struggling again — this pessimism toward the region is likely just getting started. Says Manish Kabra, BofA ML European equity and quantitative strategist:
“We see further de-risking to come in Europe. Negativity in this month’s survey towards Europe reflects growing softness in economic data from both the core and periphery of the region.”
What It Means for You
Rebalancing is a key part of any investment portfolio. Plenty of retail investors rebalance once a quarter or year to keep their allocations on target. Professional fund managers like those questioned for the BofA ML survey rebalance tactically, which is anytime markets and events warrant it.
Often there is wisdom in going against the herd, but this looks more like the wisdom of the crowd.
European stocks were underperforming U.S. stocks and emerging-market equities even before the Russia crisis. The economic shocks from Russian sanctions are only just being felt. And sentiment is poor, which sets European stocks up for a self-fulfilling prophecy.
If you care to rebalance tactically, it’s not a bad idea to underweight your holdings of European stocks. An overweight bet on the U.S. and emerging markets should lighten up your risk load and improve your returns.
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As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.