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Fundies Crowd Into Europe, Tech Exposure

Up to Wednesday night global markets (but not so much Australia) and especially big tech stocks were hot - Nasdaq hitting new highs early in the week and proving to be a much stronger play for investors so far in 2017 than the Dow or the S&P 500.

But then the start of what could be a bit of a sell off - ostensibly the catalyst is the worries about the competence of Donald Trump and whether his grandiose plans for US tax and spending will remain in place.

But there’s also a feeling US stocks especially are overbought - tech stocks being one good example, according to some older hands around the market. While there are concerns about retail earnings and the sector’s outlook, while the quality of other earnings is also being highlighted.

Adding to the fears is the narrowness of the 2017 run up - it is concentrated in a handful of stocks led by the likes of Apple, Amazon, Facebook, Alphabet and Microsoft show not all tech stocks are roaring ahead as they did in the last tech and net boom in the late 1990s.

Energy shares have risen solidly with the jump in oil prices from a year ago and especially from last November with the OPEC production cap in place.

But now questions are being asked and we have to wonder if the global optimism among fund managers seen in the May report from Bank of America Merrill Lynch (BAML) is the peak of the Trump rally.

Besides the tech boom eurozone stocks (which are now hot after the French election result) have also seen strong demand from bullish global fund managers as fears about the rise of the populist right have eased.

Add the tech surge to the renewed appetite for EZ stocks and equity markets have been driven to fresh highs - the London and German stockmarkets hit new highs this week, while 2017 has seen a series of new highs for the Dow, S&P 500 and more recently, Nasdaq.

According to the latest survey of investors by Bank of America Merrill Lynch (BAML), a third of investors surveyed were “overweight” in technology stocks as they position themselves for the prospect of major corporate tax cuts under the Donald Trump administration (will that position last much longer if Wall Street continues to slide?)

The S&P 500 technology sector is up 18.5% (up to Tuesday night) so far this year and has gained 24% since the US election result last November – dwarfing advances in every other sector. It is in fact being driven by the continuing surge in the value of Apple, now over $800 billion.

And Amazon, another S&P 500 stock, was well Microsoft and Alphabet (Google) have ll seen sharp rises in their share prices and market values as well.

The tech heavy Nasdaq has surged 14.4% this year - driving this outperformance is the fact these tech giants (especially Apple) will be the biggest beneficiaries of any tax cut and deal on overseas cash holdings by the Trump administration (although his current woes have seen the chances of a tax deal recede).

And BAML’s survey also revealed the third highest allocation to eurozone stocks on record as the prospect of populist governments gaining power in the Netherlands and France has gone, along with expectations that Germany’s pro-EU government led by Chancellor Angela Merkel will hold on to power in September elections.

In fact having the bogey for many investor the risk of a eurozone breakup has now receded sharply, according to BAML, to be replaced by the prospect of tightening credit expansion in China (which is impacting the Australian sharemarket and currency which are market proxies for China).

Just over 30% of money managers said a Chinese stimulus slowdown was the biggest threat to their investments, up from 10% in April. By way of contrast the prospect of a eurozone breakup was cited by only 5% of respondents, with 59% investors overweight in the continent’s stocks – the best since 2015. That will change ahead of Italy’s 2018 national elections, but that is still some way off.

Big fund managers remain bullish on stocks overall, however, with more than half those polled — the most in three years — predicting that global profits would improve over the next 12 months. “Investor sentiment is bullish,” said Michael Hartnett, chief investment strategist said in the survey commentary. “But irrationality is not yet visible despite all-time highs in credit and equity markets, robust global earnings per share, and a benign French election result.”

The survey was carried out between May 5-11 with investors holding a total of $US645 billion in assets under management. “European equities seem due a pause”, added Mr Hartnett, who said the market’s take on the continent was looking “frothy”. In fact eurozone stocks are approaching two-year highs, having rallied by about 10% so far this year on the back of a strong economic recovery (especially employment), robust company earnings and voters’ rejection of populist parties in elections.

But around 20% of investors surveyed by BAML considered European share valuations excessive. In contrast, 82% think US stocks as expensive, just off April’s record high, while the Nasdaq technology index was deemed the most crowded trade. If the slide continues, that’s where much of the selling will come from.

The net U.S. equity underweight position eased slightly to 17% Overall, equity allocations rose in May to net 45% overweight, though funds trimmed the underweight positions in bonds to a net 57%.

View More Articles By Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.



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