A record proportion of big global investors reckon shares are overvalued, with the US leading the way as the most over-priced, Bank of America Merrill Lynch said on Tuesday.
The March survey from Bank of America Merrill Lynch showed that equity allocations are up to 2-year highs, despite a net 34% of investors thinking stocks as overvalued.
And despite those concerns about shares being overvalued, 48% of investors in the survey were overweight shares.
While world share prices (as measured by the various indices) are their most expensive in 17 years, bond yields – the usual killer – will need to be much higher than they are currently to trigger a swing to a equity bear market, the survey also showed.
The poll of investors managing US$592 billion worldwide was conducted from March 10-16, a period that saw Wall Street’s recent string of record highs fizzle out and the Federal Reserve raise US interest rates for a third time in a decade.
It was released on Tuesday, the day Wall Street broke its 110 day without a 1% or more fall as investors started souring on the Trump story of lower taxes and higher spending.
Markets in Asia also sold off, as did European bourses later in the night. In Australia the ASX lost around 1.6% in its biggest fall so far in 2017.
That souring of confidence in President Trump and his agenda, rather than a rise in rates, is likely to see Wall Street sell off for the next few months, or until Trump shows leadership and regains the political ascendancy. Oil again eased, gold rose though on the increase in volatility as the US dollar remained weak.
The survey said the perception about market value varies by region, with consensus considering US equities as being by far the most expensive globally, with net 81% saying they are overvalued.
That tells us that if this belief Trump has lost clout so early in his presidency, then investors could be tempted to take profits and retreat to the sideline.
Meanwhile, emerging market and eurozone stocks are seen as undervalued and they could benefit if US investors sell and look for new homes for their money.
US stocks have been pushing deeper into record territory since Donald Trump won the US presidential election on November 8 — on expectations that he would deliver on his campaign promises of fiscal stimulus, tax reforms and softer regulation.
Those expectations have started to be questioned in the past few weeks and Wall Street share prices have slowed – helped by a sell off in oil which continues to threaten to tip lower as US shale il production rises.
Valuations have crept higher as a result, with the S&P 500′s forward price-to-earnings ratio rising to its highest level earlier this month since 2004, according to FactSet data.
The survey published on Tuesday also showed that 36% of those polled think higher interest rates will be the most likely factor ending the 8-year equity bull market.
Some 35% of respondents, rather than weak company earnings (21%) see interest rate rises eventually choking off the boom.
But there is a way to go according to the investor group.
A net 36% says the 10-year US Treasury yield will have to rise above 3.5% before a bear market hits stocks. The yield has risen sharply since mid-2016 but has struggled to rise above 2.5%. The last time it was higher than 3.5% was six years ago when yields were falling.
While the Fed raised rates last week and is on course to tighten further this year investors are sceptical growth and inflation will be strong enough to warrant a sustained series of hikes, and longer-fated yields have eased in the past few trading as a result.
As a result of the fall in US bond yields, the greenback has gone south, hitting a six week low overnight Tuesday against a basket of its major trading currencies.
According to the investor survey, they see the greenback at its most overvalued level since June 2006 and long dollar positions were once again far and away the most ‘crowded trade’ in world markets.
Despite the extreme pricing in stocks and the dollar, investors are confident neither is in bubble territory, and that economic growth and profits will continue to rise.
A net 57% of those polled said global profits will improve over the coming year, up from 55% in February and close to a seven-year high.
European elections leading to euro zone disintegration remained the biggest ‘tail’ risk to world markets followed by a global trade war, although both risks diminished from February.
The average cash balance slid to 4.8%, from 4.9% previously — with an above 4.5% reading suggesting a contrarian buy signal for equities.
Monthly changes to investor positioning from February to March, showed a rotation out of US, energy names, bonds and the UK and a rotation into emerging markets, utilities, staples and broad equities.
