While the macro facts on hand still favor continued volatility and hence a well-diversified and defensive overall strategy, investors' views are increasingly becoming too one-sidedly negative. With this in mind, we recently began to re-deploy some of our excess cash, first in the bond markets, then in gold, and now in global equities.
In April, following a historic surge in US interest rates in the first three months of this year, we bought investment grade bonds (IG) to reduce our previously very large underweight in fixed income. Our expectation was that the upward momentum in rates had peaked for now. Indeed, rates have been largely moving sideways since, which has supported the IG bond segment.
Similarly, earlier this month we added to our gold position on weakness, doubling our existing tactical overweight. With the fundamental case for gold intact, we viewed the recent selloff as overdone. Lastly, following one of the worst monthly stock market setbacks in many years, last week we also topped up our equities position to trim our overall underweight in the segment.
Nevertheless, following these purchases our liquidity position remains well above neutral, as we were previously holding historically very high levels of excess cash.
Sentiment is too one-sidedly bearish
From history and behavioral observation, we know that price trends tend to weaken and eventually reverse once sentiment and positioning become too one-sided – and such indications have been increasing of late. For instance, the ratio of bearish-to-bullish individual investors has hit the highest level since the turmoil that was triggered when Iraq invaded Kuwait in 1990 (graph 1).
Institutional positioning has also approached long-term bearish extremes: the put/call ratio is near the upper bounds of the past decade's range and Bank of America's monthly global fund manager survey for May showed that cash allocations have reached the highest level since 2001, which was the year of the 911 terrorist attacks. These developments suggest that broad investor sentiment is becoming too one-sided, and that markets are thus due for meaningful countermoves in the coming days or weeks.
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Note: The next edition of the LGT Beacon is scheduled for June 2022.