Record number of investors say shares are ‘overvalued’

A record number of fund managers say global equities are expensive and monetary stimulus from central banks has become excessive, according to Bank of America Merrill Lynch's (BAML) monthly survey of global fund managers.

In a monthly survey, 44 per cent of managers, who look after nearly $600 billion (£469 billion) in assets between them, are taking a ‘cautious’ stance on global equities, up from 37 per cent the previous month, with 84 per cent saying the US is the most overvalued region.

‘Market vulnerability to profit weakness is very high,’ said Michael Hartnett, BAML's chief investment strategist, ‘with investors' perception of excess valuation coinciding with high global profit expectations.’

Ronan Carr, European equity strategist, argues that because allocation to eurozone equities remains near historical highs, ‘the pause in performance may last a while longer’.

However, while many view global equities as expensive from a valuation perspective, 40 per cent of fund managers remain overweight equities versus other asset classes, suggesting there is unlikely to be a sell off any time soon.

Almost half – 48 per cent - view emerging market equities as the most undervalued, while 18 per cent see best value in Europe where allocation to equities remains near a two-year high at 58 per cent. Allocation to Japanese equities has fallen, however, from 12 per cent net overweight to just 1 per cent.

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Will the bull run continue?

Matthew Page, manager of Guinness Global Equity Income, says strong company earnings growth continues to drive optimism in the market, with 75 per cent of S&P 500 companies exceeding the earnings per share (EPS) estimate for Q1 2017, and 64 per cent beating sales estimates. He also highlights Europe and emerging markets as opportunities.

Internet stocks and the US Nasdaq Composite, on which most of the world's largest technology companies are listed, are the riskiest trade right now, says the BAML fund manager survey (FMS).
Almost 40 per cent say long Nasdaq is the most crowded trade in the markets, up from 26 cent in May.

Over 50 per cent said internet stocks are expensive, with almost 20 per cent believing they're in bubble-like territory. This preceded last Friday (9 June) and Monday's (12 June) sharp sell-off among large tech stocks, triggered by a Goldman Sachs report describing a ‘valuation air pocket’ affecting the tech sector.

Despite this, the percentage of managers with an allocation to tech stocks increased from 33 per cent to 37 per cent.

At the same time, 47 per cent of respondents say global monetary policy is too stimulative – the highest figure in six years. Those expecting economic growth have fallen from a high of 62 per cent in January to 39 per cent. Inflation expectations have also continued to fall, with 60 per cent of fund managers calling for higher inflation, down from 75 per cent just two months ago.

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The biggest potential risk to global growth, says the survey, is Chinese credit tightening. Almost a third of those surveyed picked it out.

While valuations do look stretched in some regions, an air of cautious optimism on the medium-term outlook for global equities seems hard to shift.

With global economic indicators strengthening and earnings picking up, global equities may deliver modest returns, but with higher volatility.

Additionally, if the US administration does push through pro-growth policies and boost corporate earnings – no guarantees where Donald Trump's concerned - markets worldwide will benefit.

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interactive-investor-logo-small-sizeThis article was originally published on our sister website Interactive Investor.

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