Record Number of Funds Buying Insurance Against Stocks Fall


FLASH: Global investors’ equity allocations fell 6% in May and 34 % of fund managers have taken out protection against sharp stock market declines in coming months, Bank of America Merrill Lynch’s (NYSE:BAC) latest monthly survey found Tuesday.

The proportion of investors preparing for equity falls is the highest in the survey’s history, BAML said, noting that trade disputes are seen as the Key risk by 37% of participants, followed by a Chinese slowdown which was picked by 16%.

The survey of funds managing close to $687-B was conducted on 3-9 May just as US-China trade talks turned. The proportion of funds naming trade war as the biggest risk rose by 17% over last month, and latest developments appear to have vindicated their fears.

President Trump Friday carried out his threat to hike tariffs on an additional $250-B of Chinese goods.

China’s decision Monday to respond in kind sent global equities into their worst 1-day decliner YTD.

record 34% of investors had bought portfolio hedges, BAML said, adding that allocation to safe-haven cash had risen 7% to a net 33% overweight.

“(Investors) are well-hedged but not positioned for a breakdown in trade talks,” BAML’s chief investment strategist told clients. “Investors see little reason to ‘buy in May’ unless the 3Cs – credit, the consumer, and China – quickly surprise to the upside.”

The survey found the overall net equity overweight had dropped to just 11%, while a net 34% were underweight on bonds, the highest in 7 years. Emerging markets were the most preferred equity class with a net 34% overweight, while the least favored was the UK with a net 28% underweight.

US tech stocks are the most crowded trade, displacing short European shares for the 1st time since November 2018. The change came as Eurozone equity allocations jumped to 9% overweight off 7-year lows hit in January.

BAML said the “intention to own” European stocks had risen to the highest level since last May “amid greater economic confidence, despite heightened trade war risk.”

Long USD and long EMs (emerging markets) were the 3rd and 4th most crowded trades respectively.

In keeping with the anxiety over global economic growth, allocation to commodities fell 11% to a net 8% underweight, BAML said.

Tuesday, the major US stock market indexes finished at: DJIA +207.06 at 25532.05, NAS Comp +87.47 at 7734.47, S&P 500 +22.54 at 2834.41

Volume: Trade on the NYSE came in at 769-M/shares exchanged

  • NAS Comp +16.6% YTD
  • Russell 2000 +14.4% YTD
  • S&P 500 +13.1% YTD
  • DJIA +9.5% YTD

HeffX-LTN’s overall technical outlook for the major US stock market indexes is Neutral Short Term, Bullish Long Term

Stay tuned…

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