Fund managers from across the globe have signalled that equities are overvalued with US stocks identified as the most expensive, according to a closely watched Bank of America Merrill Lynch survey.
This month’s BofA Merrill Lynch Fund Manager Survey – seen as a bellwether of sentiment in the asset management industry – has revealed that a net 34 per cent of fund managers from all over the world believe equities to be overvalued, the highest figure since 2000.
Markets have climbed in recent months following the election of Donald Trump as US president.
Trump is widely expected to enact pro-growth policies aimed at stimulating the economy, while sentiment for global growth has also picked up.
However, the rise in blue-chip indices in developed markets has caused some concern over whether current valuations are sustainable, as illustrated by the chart below.
Equity markets valuation
Source BofA Merrill Lynch
An overall total of 200 panellists with combined assets under management of $592bn participated in the survey between 10 and 16 March 2017.
Unsurprisingly, US equities have been judged as the most overvalued by global managers, with the S&P 500 index up by 16.29 per cent in dollar terms.
A net 81 per cent of respondents said the US region was overvalued with a net 32 per cent of fund managers believing the US dollar was also overvalued, the highest level since 2006.
Indeed, concerns about overvalued US equities has prompted a rotation out of US equities, the biggest positioning change by fund managers in March.
The rotation out of US equities has seen an accompanying shift into emerging markets, one of the areas identified by a net 44 per cent of managers as the most undervalued region for equities.
The survey also revealed a rotation into Europe after a net 23 per cent of fund managers thought eurozone equities were undervalued.
Other abandoned by managers in March included the energy sector, bonds and the UK.
Michael Hartnett, chief investment strategist at BofA Merrill Lynch, said: “Investor positioning argues for a risk rally pause in March/April, with allocation to equities at a two-year high and bond allocation at a three-year low.
“Policy is the key catalyst for the Icarus trade to fly higher in the coming months.”
Ronan Carr, European equity strategist at the bank, added: “Investors are positive on European macro and see more value in equities than in the US, but there is a risk of complacency on French elections.”
As the eight-year equity bull market has extended into March, manager opinion over the biggest threat also changed.
In February, protectionist policies had been the main source of concern to fund managers. However, that had subsided in March with 36 per cent highlighting higher interest rates as the most likely catalyst to end the bull run. Concerns over weaker earnings were also higher in March than in February.
As the threat of protectionist policies receded, so too did the number of fund managers regarding a trade war as the biggest tail risk to markets, dropping from over 30 per cent to 20 per cent.
The biggest tail risk for markets remain European elections raising disintegration risk, highlighted by a third of managers. A crash in global bond markets was the biggest tail risk for 18 per cent of respondents.
The inauguration of Trump earlier this year has raised expectations for the new president to enact a number of the policies floated during the election campaign.
One of the key policies anticipated by US markets was the promise of tax reform, providing a boost for US firms.
Trump had earlier in the year said reform would likely come before the end of 2017, which managers have already begun anticipating as the below chart shows.
How soon do you expect tax reform to be passed in the US?
Source BofA Merrill Lynch
However, difficulties in passing a health bill through the Republican-controlled House of Representatives has raised questions over whether he will be able to secure backing for the tax cuts.
While markets have already begun to price in the president’s pro-growth and pro-inflation policies, managers have begun to anticipate how the Federal Reserve might act to prevent inflation from running to high.
A 25 basis point increase was announced earlier in March, with two or three expected later in the year.
The survey revealed that 30 per cent of fund manager respondents expect the rate tightening cycle to end with a Fed funds rate of between 2.05-2.5 per cent. A further 27 per cent believe that it will end at between 2.55-3 per cent.
Elsewhere, expectations for Chinese growth have jumped to 11 per cent, the highest level since September 2013.
How do you think the Chinese real economy will evolve over the next 1yr?
Source BofA Merrill Lynch
Expectations for faster global growth expectations remaining high among fund managers at a net 58 per cent, although slightly down from a net 59 per cent in February.