Stocktake: stocks enjoy double-digit gains but fund managers are cautious

Global stocks have enjoyed a double-digit percentage gain since Christmas, but fund managers remain decidedly cautious judging by Merrill Lynch’s latest monthly fund manager survey. Merrill’s survey is best viewed as a contrary indicator, with bearish extremes typically marking good times to buy. So contrarians will be delighted with the latest findings. Allocations to global equities slumped over the last month, hitting their lowest level since September 2016, while bond allocations hit levels unseen since June 2016’s Brexit vote.

Sentiment towards European equities is especially cautious, with the percentage of investors intending to own European stocks over the next year falling to its lowest level in six years.

Remarkably, the percentage of fund managers overweighting cash has hit its highest level since the global financial crisis was raging in January 2009.

Profits expectations are the most bearish recorded over the last decade and below levels which coincided with market lows in 2010, 2011, 2012 and 2016, notes Fat Pitch blogger and sentiment expert Urban Carmel.

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Global macro growth expectations are also the most pessimistic seen over the last decade, and below levels recorded at major bottoms in 2011 and 2016. The latest survey is the mirror opposite of that seen at January 2018’s market top, when exuberant investors bet stocks would keep on rallying. Right now that exuberance is conspicuous by its absence.

Fickle investors pile into emerging markets

That fund managers can be a fickle bunch is made clear by the about-turn in sentiment towards emerging markets. Just last month fund managers were very iffy about emerging markets’ prospects: being short the region was the third most crowded trade. Now being long in emerging market is regarded as the most crowded trade in global markets.

Not only that, a net 37 per cent of fund managers are overweight in emerging markets, almost twice as great as long-term norms. The enthusiasm is understandable on many levels. Pummelled last year, emerging markets look much cheaper than other regions, while the Federal Reserve’s indications that it will pull back from planned interest rate hikes in 2019 bodes well for emerging economies.

Nevertheless, emerging markets usually do well when sentiment hits bearish extremes and not so well when excessive bullishness takes hold, suggesting the region is at risk of underperforming in coming months.

Are tech stocks back in bull-market mode?

The technology-heavy Nasdaq index has gained 20 per cent since bottoming on Christmas Eve. Are tech stocks back in bull-market mode? Well that depends on how you define these things. The Nasdaq fell into official bear market territory after falling over 20 per cent between August and December. Some commentators say that bear market is over now stocks have advanced 20 per cent. Based on this definition, they add, the Nasdaq has just exited its longest bear market since 1991.

However, the problem with that definition is that stocks can gain 20 per cent in bearish environments; for example, there were many such rallies between March 2000 and October 2002, during which time tech stocks fell almost 80 per cent. Definitions aside, it's clear the recent enthusiasm towards tech shares is more muted than that seen in 2017 and the first half of 2018, when investors couldn't get enough of the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google).

The Fang+ index soared in the month after stock markets bottomed in February 2018, gaining more than twice as much as the S&P 500. Since Christmas, however, the outperformance has been relatively minor, while three of the FAANGs – Amazon, Apple and Google – have underperformed the S&P 500 in 2019. Investors may not be feeling bearish towards tech stocks right now, but nor are they raging bulls.

Insider trading allegations at Apple

The US Securities and Exchange Commission (SEC) has charged former Apple lawyer Daniel Levoff with illegally trading company stock over a multi-year period. Ironically, it was Levoff's job to make sure Apple employees didn't break insider-trading laws, but that isn't even the most notable feature of this case. For one, the alleged sums involved were strangely small for a wealthy senior executive. For example, court filings say Levoff bought $115,700 worth of Apple stock on October 26th, 2015, the day before the company reported quarterly earnings, and sold them two days later for an illicit [but meagre] profit of $4,700.

Worse, he allegedly dumped roughly $10 million of Apple stock – almost all his holdings – just before the company announced in July 2015 it would miss iPhone sales estimates. The stock fell over 4 per cent after reporting earnings, allowing him to avoid “approximately $345,000 in losses”, the SEC said. That’s one way of looking at it. Apple is up almost 50 per cent since then, meaning Levoff seemingly missed out on millions of dollars in gains.

Insider trading isn’t just a risky business that can land you in prison – do it badly and it can cost you bucket loads of money.