Fund managers have shrugged off concerns over toppy valuations in the US by moving to their biggest overweight since January 2015, according to a closely watched industry survey.
The latest Bank of America Merrill Lynch (BofA Merrill Lynch) Global Fund Manager Survey has revealed increased appetite for US equity exposure after it became the most popular region for asset allocators for the first time in five years.
The S&P 500 index has performed strongly in 2018, delivering a total return of 9.44 per cent (in sterling terms) outstripping a gain of just 5.78 per cent for the broader MSCI AC World index.
As such, the survey – which polled 185 participants with $534bn in assets under management between 3 and 9 August – revealed that a net 19 per cent of managers are now overweight US equities.
Source: BofA Merrill Lynch Global Fund Manager Survey
A 10-percentage point month-on-month rise in asset allocators moving to an overweight position in US equities helped pushed the figure to its highest level since January 2015.
The shift towards US equities has been reflected in the more positive outlook for profits with 67 per cent of allocators highlighting the US as the most favourable market, a 17-year high. In comparison the outlook for other major regions remains broadly unfavourable, with the outlook for Europe flat.
This is tempered somewhat by a fall in expectations for broad corporate earnings, as the proportion of allocators of investors expecting a 10 per cent increase fell again in August.
Sectors that have benefited most from the surge in increased appetite for US equities have been technology and healthcare, which remain among the most overweighted in August.
The surge into US equities was part of a broader rotation towards so-called ‘safe haven’ assets, with a pick-up in cash levels also reported in August and a drop off in commodities and defensive stocks such as energy and consumer staples.
Cash positions increased to 5 per cent from 4.7 percent in July, with the bank’s Cash Rule continuing to signal a buy signal for risk assets over the past seven months.
As such, allocation to equities also saw a double-digit month-on-month rise in allocations moving to a net 33 per cent overweight among survey respondents.
Allocations to bonds meanwhile fell to a net 54 per cent underweight, ending a six-month consecutive month rise as investors believe the Federal Reserve’s tightening cycle will continue.
Yet, rising concerns over higher levels of debt could suggest that there is further downside for global equities versus bonds.
Source: BofA Merrill Lynch Global Fund Manager Survey
Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, said: “Rising corporate leverage concerns say bonds should outperform stocks, while a weaker profit outlook suggests defensives could outperform cyclicals.
“With investors telling us they are long the US, the Fed and cash, our view remains: peak profits, policy and returns.”
On the outlook for global markets, allocators remain split over whether the current decoupling will continue. The survey revealed a 34 per cent of respondents expect the process to continue, although 32 per cent expect US growth to slow and a further 28 per cent think Asia and Europe will recouple as growth accelerates.
While the outlook for global growth remains muted – with a net 7 per cent expecting global economy to contract – there was some improvement on July.
One of the biggest areas for concerns remains the possibility of a trade war, as US president Donald Trump has continued to pursue a more aggressive trade policy levying more tariffs against China, prompting retaliatory measures.
Indeed, managers have identified trade war as the biggest tail risk for markets in five months this year.
Investors retain a small underweight towards emerging markets in portfolios, with a net 1 per cent of respondents. This is down 44 percentage points since April and represents its biggest monthly drop for two years.
However, current positioning is nowhere near previous crises where underweight positions swung out to double-digit figures.
After several months of improvement, fund managers once again turned bearish on UK equities in August amid concerns over a ‘hard Brexit’, fuelled by several high-profile resignations in July over the ‘soft Brexit’ approach backed by prime minister Theresa May.
Indeed, the UK market saw the biggest monthly drop among asset allocators since May 2016 – one month before the referendum on continued EU membership – falling to a net 28 per cent underweight.
Source: BofA Merrill Lynch Global Fund Manager Survey
Sentiment towards European equities improved with a 17 per cent overweight ending six months of falling allocations, while Japanese equities exposure also increased slightly to an 11 per cent overweight.
More bullish signs were on display among regional fund managers, particularly in Europe, as allocators cut cash levels from 5 per cent to 4.3 per cent after a ‘truce’ between the EU and US was reached over a potentially spiralling trade war, although protectionism remains the region’s biggest concern for managers.
The regional editions of the survey – which polled 129 managers with $354bn in assets under management – revealed that a net 12 per cent of investors expect the European economy to strengthen over the next year, up from 6 per cent in July, while expectations of recession also shrank.
On a macroeconomic level, 85 per cent of European allocators expect inflation to rise during the next year, with 64 per cent claiming that European Central Bank’s monetary policy is too stimulative.
Germany overtook France as allocators most overweighted market for the next 12 months, while regional sentiment towards the UK plummeted month-on-month from 3 per cent net underweight in July to 48 per cent underweight in August.