Fund managers hate the US right now – so when’s the bounce coming?

A survey of fund managers finds most of them think US stocks are overvalued. They are certainly expensive, says John Stepek. But it’s hard to argue they’re in a bubble.

Fund managers hate the US right now – so when’s the bounce coming?

From John Stepek, across the river from the City

Dear Reader,

John Stepek

I get lots of emails every day from investment banks, PRs, estate agencies, strategists, fund managers – you name it.

There are far too many to read. Even when you sift out the irrelevant stuff, there’s still not enough time in the day to read everything that might catch your interest. I’m sure it’s a problem a lot of you are familiar with.

However, there is one monthly survey that I always keep an eye out for.

And at the moment, it’s saying something very interesting about the UK…

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It’s good to know what fund managers think – so you can do the opposite

The Bank of America Merrill Lynch global fund manager survey looks at how money managers are feeling about the investment world.

It comes out every month, and I like to keep a close eye on it. It’s not exactly a contrarian indicator (few such indicators are all that reliable, and you can rarely look at them that simplistically), but it does tend to be worth paying attention to anything that is particularly loved or hated at any given point.

Why’s that? At the end of the day, what moves prices is not news, or sentiment, or good or bad economic data, or even interest rates. It’s money flows. Prices rise when money flows into an asset class. They go down when the money flows out.

And if nothing else, the people who take part in these surveys are in charge of significant amounts of the money that moves global markets. If most of them are bullish on an asset class, it means there’s not much uncommitted money left to be channelled into it. On the other hand, if most of them hate an asset class, there’s plenty of scope for them to change their minds and buy.

For example, when they’re feeling jittery – lots of cash stored up – it has proved a good time to buy in the recent past. I’ve just looked back at the survey from February 2016. If you’ll remember, that was the climax of the China/Federal Reserve-inspired selling panic that hammered stocks at the start of last year. It was one of the best times to buy in the last 18 months.

At that point, fund managers’ average cash balances were at 5.6% – which doesn’t sound like much until you realise it was the highest cash holding since November 2001. So it was a good time to do the opposite of what the managers were doing, and turn bullish.

Thus the question is: what do fund managers think right now? And how could their expectations be thwarted?

The most hated country in Europe

First things first – if you’re a knee-jerk contrarian, then it’s good news for US stocks. The pros hate them right now. A net 83% of investors – the highest ever – think US stocks are overvalued. And they’ve followed through with their money; as a group, they are “underweight” US stocks by the most since January 2008.

Also, being bullish on the US dollar is still seen as the most crowded trade (in other words, managers think their colleagues are too bullish on the US currency).

Meanwhile, investors reckon both eurozone stocks and the euro are undervalued. Allocations to eurozone equities are their highest in 15 months. That’s despite the fact that EU disintegration is still seen as the biggest “tail risk” (ie, a thing that is unlikely to happen but would seriously affect markets if it did happen).

When I look at readings like that, it does get me thinking that the US might be due an imminent bounce back. US stocks are expensive, no doubt about it. But as Jeremy Grantham of GMO has pointed out, in the absence of euphoria (and there’s certainly not much of that about) it’s hard to argue that they’re in a bubble.

To be clear, that doesn’t make them particularly compelling and I have no desire to buy – I’m not especially interested in attempting to time a trading bounce. But there are plenty of other assets that look more overvalued. Bonds are one obvious one. And there are far more signs of irrational exuberance in other sectors (the boom in privately-funded tech companies for example – there’s a great story on Bloomberg about a high-tech juicer that has unmistakable echoes of pets.com or Webvan).

The fact that managers are also waving away concerns about the eurozone, despite the looming reality of a critical French election that could really set the cat among the pigeons, also seems complacent. Again I’d favour eurozone stocks over the US on valuation grounds, but I’m under no illusions as to how bumpy a ride that could end up being this year.

What could reverse this situation? Firstly, US sentiment could be improved if we see some political progress in the US (a nudge towards tax reform getting done), or maybe some intervention from the central bank. Maybe the Federal Reserve will take its foot off the gas pedal, for example. Secondly, if Marine Le Pen does well on Sunday, that could really sour sentiment towards Europe.

So where does that leave investors? Well, there’s one country I haven’t mentioned. It’s in Europe, but no one likes it. It’s the UK. And interestingly enough, even before this survey came out, fund expert and regular MoneyWeek contributor Max King had already written a piece for us saying that he thinks it looks a great contrarian bet.

You can read all about why he thinks so – and get his tips on the funds best-placed to enjoy the UK bounce – in the latest issue of MoneyWeek magazine, out tomorrow.

A note on the French election and your holiday money

By the way, earlier this week, in my piece on the French election, I suggested holding off on buying your holiday euros until after the vote. I’d like to add a caveat to that because of two points.

Firstly, there is an outcome that would be good for the euro. It’s still most likely to be Emmanuel Macron vs Le Pen in the final round. That wouldn’t move markets much. There’s an outside chance it could be Jean-Luc Melenchon vs Le Pen. That would almost certainly hammer markets. But there’s also an outside chance that it could be Francois Fillon vs Macron. That would probably lead to a relief rally and a stronger euro. So that’s a possibility to be aware of.

Secondly, we’ve just had the UK election announcement. That sent the pound a lot higher. People have gone back and forth on whether that’s due to hopes for a “softer” Brexit or not. For what it’s worth, I think it’s got nothing to do with Brexit. Investors clearly reckon that Theresa May is relatively competent (not hard, given the competition). Her main problem is her small majority. If she can get a bigger majority, that translates into more certainty, and markets like certainty.

Anyway, it means sterling is now almost as well-priced against the euro as it has been since the Brexit vote. So if you’re wary of a surprise upside outcome for the French election, you should maybe look at changing half now and half next week – not that I want to encourage amateur currency speculation…

Until tomorrow,

John Stepek
Executive editor, MoneyWeek

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How Brexit could disrupt Britain’s supply chains

By Matthew Partridge

Road haulage isn’t exactly the most glamorous industry. But without the tens of thousands of lorries that drive up and down the motorways every day, the economy would quickly grind to a halt. Indeed 80% of freight to and from the UK comes directly by lorry, and a good slice of the rest involves a truck journey at some point.

Jack Semple is policy director of the Road Haulage Association (RHA), which represents 7,000 firms, from large trucking companies to individual operators. I spoke to him about how Brexit could affect both his members and the overall economy.

There could be some benefits, Sample admits. At the moment, two overlapping European directives regulate the numbers of hours that lorry drivers can work. This means that they have to obey two sets of rules and keep multiple records. There is also a push for drivers to do a certain number of hours of continuing professional development every year, which is also disliked by many operators. Brexit could be an opportunity to “take a fresh look” at the various regulations affecting the haulage industry, says Semple, although he “doesn’t expect sweeping changes”.

However, other impacts are less positive. All firms that move goods on a regular basis (including their own) need to apply for a goods vehicle operator’s licence, in addition to a Large Goods Vehicle (LGV) licence for the driver. At the moment, those who have permission to transport goods in the UK get automatic access to the rest of the EU. However, he worries that once Britain leaves the single market, British companies that wish to deliver goods to the continent will need to apply for additional licences. Not only could this cost extra time and money, but the requirements for each country are slightly different.

Semple is also extremely concerned about a shortage of workers. Because driving a lorry is seen as a tiring, repetitive task, a large number of the commercial drivers currently on British roads come from the rest of the Europe, especially eastern and central Europe. Indeed, he estimates that around 60,000 out of a total British workforce of around 80,000 come from the rest of Europe. He hopes that they will be allowed to continue doing this since a large labour pool is vital to making sure that deliveries and supply chains can continue to run smoothly.

However, for him the biggest concern is around the decision to leave the EU’s customs union. To recap, the customs union involves the EU and other countries not only agreeing to free trade in goods with each other, but also to levy common tariffs with third countries. Although all EU members are also members of the customs union, you can be in the single market (via the European Economic Area) without being in the customs union; Turkey, by contrast, isn’t in the single market, but is in the customs union. Despite early speculation, Theresa May explicitly stated that Britain will leave the customs union, and the RHA is therefore “preparing for the worst”.

The big problem is that leaving the customs union almost guarantees that all goods entering the UK from Europe, and vice versa, will have to undergo customs clearance. This will be to make sure that companies don’t attempt to use any free trade agreement to sneak in products from third countries that either the EU or the UK has a favourable agreement with. At the moment, only 1% of lorries travelling between Britain and Europe come from outside the EU, so virtually all lorries are unaffected. However, if Britain does leave the customs union then every lorry will have to undergo these checks.

At the moment the direct admin costs are relatively low, around £30-£50 per truck. However, even at current low non-EU volumes, the process of checking each shipment takes around four hours per vehicle, generating labour costs, which will then be passed on to the consumer. Worse, UK customs are focused on airfreight and ships, not lorries coming off ferries or through the Channel Tunnel. Overall, they are simply not set up to deal with the huge increase in the amount of work. The result is that, unless there is a huge increase in the amount of money spent on customs, there could be huge delays.

Semple admits that the true extent of the problem is a “known unknown”. However, he’s really worried, especially given that supply chains are currently built on the assumption that “it’s as easy to move goods from Manchester to Turin, as it is to shift them from Manchester to Leeds”. “Just in time” manufacturing processes also rely on speed. Overall, this could disrupt everything from “supermarkets to factories”.

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