Global fund managers have raised their cash weighting towards the top of its historical range, according to the May Merrill Lynch survey – see first chart. Defensive positioning would be warranted if monetary policies had tightened and the economic cycle was turning down. The indicators tracked here, however, suggest that monetary conditions have loosened since end-2013 while economic growth is about to pick up.


A turnaround in Chinese economic momentum is signalled by today’s May flash PMI survey conducted by Markit, showing a further rebound in new orders – second chart. This rise is consistent with recent stronger monetary trends – see previous post – and should be confirmed by the official survey released at the start of June.  Japanese new orders also recovered this month but Eurozone orders softened*.


Stronger global growth over the remainder of 2014 could be associated with stable to easier monetary policies. The Fed and Bank of England have all but ruled out rate rises this year, while the ECB is certain to cut next month, and China may soon reduce reserve requirements. Firmer currencies should facilitate easing in other emerging economies – Turkey cut rates unexpectedly today. Longer-term bond yields have declined in most markets recently – third chart.


Stocks in cyclical industries should outperform non-cyclicals if global economic conditions strengthen. Cyclicals have lost ground during the growth slowdown between late 2013 and this spring but usually exhibit relative strength after the global longer leading indicator tracked here moves above average, as it has this month – fourth chart*. The Merrill Lynch survey suggests that fund managers are underweight cyclical exposure.


*Manufacturing surveys – the Eurozone services survey strengthened.
**The cyclicals grouping shown includes materials, capital goods, consumer durables and IT. Non-cyclicals include utilities, healthcare and consumer staples.