LONDON, Aug 12 (IFR) - The number of investors buying crash protection against a sharp fall in stock markets over the coming months has risen to its highest level since October 2008, according to Bank of America Merrill Lynch’s fund manager survey for August.
Investor cash holdings have also risen sharply over the past month from 4.6% to 5.1% - their highest level since June 2012 - as concerns over geopolitical risk have spiked since the July survey.
“At these high levels, it suggests that all kinds of risks are priced in over the near-term,” said Manish Kabra, European investment strategist at BAML. “We expect risk assets to rally in August and move towards recent highs. But absent capitulation on the growth outlook, it is not time to close your eyes and buy - it’s not necessarily a long-term trade.”
Volatility slumped to record lows earlier in the summer on the back of ultra-loose monetary policies from the world’s four largest central banks. The CBOE’s equity volatility index - or VIX - fell to a six-year trough of 10.32 in July as the S&P500 reached a new high of 1,991. Fixed income strategists had to dust down the history books to find when foreign exchange and rates volatility had last plumbed such depths.
But volatility has edged upwards since signs of the Ukraine crisis escalating after the MH17 air disaster in July, which sparked a further round of sanctions from the US and European Union against Russia, causing it to retaliate with its own ban on selected food imports. The VIX spiked to a four-month high of 17.57 during trading on August 1 as stock markets sold off.
The BAML fund manager survey confirmed that geopolitics is at the forefront of investors’ minds, with 86% citing it as the greatest risk to financial stability - up from 74% in July and 53% in June. This trumped worries over monetary policy risk (such as higher rates and higher FX volatility), which 58% of investors cited as a risk to financial stability.
“We’ve only seen concern over geopolitical risks at a higher level in the Arab Spring of 2011. This is the third highest reading in ten years,” said Kabra.
Derivatives desks have reported strong demand for put options to protect equity portfolios. S&P 500 skew - the difference between the price of in-the-money and out-the-money put options - spiked to its highest level in a year last week, according to strategists at Societe Generale.
Many investors appear to have lost faith in European equities following a slew of weak economic and inflationary data and fears that sanctions will weigh further on the continent. A net 13% of fund managers are currently overweight Eurozone equities - a sharp fall of 22 percentage points in the space of a month.
Three months ago, a net 28% of investors expected to go overweight European equities, BAML said, which has now swung to a net 4% saying they would go underweight the region. Eurozone banks have been particularly badly hit, with weighting to the sector falling to a two-year low.
Global investors have led the charge out of Europe. Their profit outlook for European companies has fallen sharply from the highest level since the BAML survey began earlier this year into negative territory. Their intention to own European equities on a 12-month view has also swung sharply from over 40% into negative territory.
“Global investors are losing patience on European profitability,” said Kabra.“Local investors are still quite positive, though, with net 53% expecting profits to rise.”
As well as remaining on investors’ balance sheets, much of the cash leaving European equities has found its way into emerging markets, commodities and defensive stocks. Asia Pacific investor allocation to China is also at an 11-month high, the BAML survey found.
But most investors still believe the ECB will undertake quantitative easing at some point, with 63% of respondents still expecting some kind of asset purchase programme. However, the consensus has shifted from the end of this year to sometime in 2015. (Reporting by Christopher Whittall, Editing by John Mastrini)