Positioning for an economic recovery
Optimism over the global growth outlook continues to build at a respectable pace, and asset allocations are shifting in a pro-risk direction. Our survey suggests investors are back to overweight equity/underweight bond positions. Alongside historically significant overweight EM equity positions and a stretched EM FX position, this suggests that pressure on the USD related to a positioning adjustment to an early cycle environment has probably come to an end. The main risk to this view is that the overweight US equity/underweight Eurozone equity position is unwound as and when any global economic upswing is perceived to be broadening. Thus far there seems to be little forward indication of this type of USD negative shift from the internals of our survey.
Potential FX order flows
FX order flow summary:
1) Limited scope for additional EM FX demand given near record "long" positions in both EM currency and underlying equities.
2) Euro selling as the deteriorating view on the Eurozone in terms of regional preferences and adverse valuation could prompt increase in underweight Eurozone equity position.
3) No material USD selling as rising regional preferences toward the US and lack of material USD over-valuation support the overweight US equity position.
4) JPY buying as underweight Japan equity reduced further and moderation of bearish views and reduction in valuation concerns lead to decrease in underweight JPY FX position.
5) GBP buying: strangely our survey suggests equity managers have not bought GBP over the last month for either equity investment or currency allocation purposes. Rather the real money demand for GBP flagged by flow anecdotes appears to have come from fixed income investors (see page 8 in Forex Portfolio Manager, 15 June 2009). Looking ahead there remains scope for GBP demand from equity managers given the improved view of the UK on a regional allocation view and the very underweight UK equity position.
