The post-financial crisis equity bull market could still have further to run despite increasing signs of concern over corporate balance sheets and indebtedness, according to the latest Bank of America Merrill Lynch (BofA ML) Global Fund Manager Survey.
Three-quarters of respondents to the survey – which polled 223 fund managers representing assets under management of $643bn at the start of May – believe the equity market has not yet peaked.
Indeed, the majority of fund managers think that the market will not peak until 2019 or later, as the below chart shows.
Source: BofA ML Global Fund Manager Survey
Such bullish sentiment can be seen in allocations to cash. The BofA ML Fund Manager Survey Cash Rule remains in contrarian buy signal territory, at 4.9 per cent, down slightly on April but above the long-term average of 4.5 per cent.
Allocation to equities also climbed 5 per cent higher to a 34 per cent overweight in May after hitting an 18-month low of 29 per cent during April.
It seems unlikely that sentiment towards equities will change in the coming months, however.
With 10-year US Treasury yields starting to breach the psychologically-important 3 per cent figure, managers now believe the yield will have to reach 3.60 per cent before they start to rotate from equities into bonds.
While allocation to bonds rose by 1 per cent, managers retain a 54 per cent underweight to the asset class.
Fund managers’ positive sentiment towards the equity markets and more risk-on behaviour is also reflected in their economic outlooks.
Just 2 per cent believe that recession is likely in 2018 although they remain split on when a recession is likely to occur, with 43 per cent plumping for 2020 and 41 per cent considering 2019.
Michael Hartnett, chief investment strategist at BofA ML, said. “Although cash levels remain high and growth optimism is at the lowest level in over two years, a majority of investors say there is room to grow in this equity bull market and don’t see signs of recession anytime soon. Fund managers think the May rally can extend in the near term.”
After a potential trade war was the leading fund managers’ tail risk for the previous two months, a policy mistake by the Federal Reserve or European Central Bank topped the table for the first time since December, although trade war remains in second place.
The third biggest tail risk was that of geopolitical developments causing oil to rise to $100 per barrel, which has come into greater focus after US president Donald Trump withdrew his country from an agreement with Iran lifting sanctions in exchange for curtailing its nuclear enrichment programme.
As such commodities exposure remains high with 6 per cent of respondents signalling an overweight in commodities, the highest since April 2012 when benchmark West Texas Intermediate (WTI) traded at $105 per barrel.
Source: BofA ML Global Fund Manager Survey
Yet, there was a 22 per cent rise in managers who believe that oil remains overvalued with 21 per cent agreeing, the highest level since September 2013.
Expectations of higher prices generally can also be seen in the survey’s expectation of higher inflation with 79 per cent expecting a pick-up in the consumer prices index (CPI) rate over the next 12 months.
Another new tail risk in this month’s survey was a credit crash, reflecting growing fears over corporate indebtedness.
Indeed, the proportion of fund managers who would like to see companies improve balance sheets – by repaying debt and topping up company pension plans – has reached an eight-year high in the latest results.
Additionally, 36 per cent of respondents claimed that companies were over-levered, which is above the 32 per cent peak in 2008.
It also comes at a time when respondents also believe that corporate margins are likely to shrink and profit expectations have slumped to post-Brexit lows, with just 10 per cent forecasting an improvement over the next 12 months.
As previously mentioned, managers continue to hold equities adding to bank, technology and telecommunications stocks during May.
One of the big reversals in May was a 9 per cent increase in allocation to UK equities during the May, with the underweight to UK stocks reduced from 33 per cent to 24 per cent.
The move marked the biggest monthly increase in allocation to UK stocks since before the EU referendum in June 2016.
Source: BofA ML Global Fund Manager Survey
However, UK equities remain the consensus short position among the survey’s respondents and the biggest underweight position.
Elsewhere, allocations to US equities fell 5 per cent to a 15 per cent underweight this month, while allocation to eurozone equities fell 1 per cent to a 14-month low.
Despite falling, eurozone equities remains the most favoured region after a double-digit drop of 16 per cent in emerging markets equity allocation, with just 27 per cent overweight compared with 33 per cent for Europe.
The most favoured overweight sector is banks, which rose by 10 per cent month-on-month to a 36 per cent overweight, while technology exposure rose by 4 per cent having fallen to five-year lows in April.
Despite ticking up, telecoms exposure along with utilities and consumer staples remain underweighted by global fund managers.
A new question included in the survey also found that 53 per cent of investors are now using exchange-traded funds, which represent 20 per cent of portfolios on average.
The passive strategies are used predominantly for equities exposure (77 per cent), with just 8 per cent used for corporate bonds and 5 per cent for government bonds.
The greatest use of passives it to increase exposure to difficult to access parts of the market, broader market exposure and as way of hedging macroeconomic and political risk.