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BofAML fund manager survey reveals concerns of overvaluation in both equity and bond markets


Investors see growing overvaluations in both bonds and equities and have signalled concern about a valuation bubble forming, according to the BofA Merrill Lynch Fund Manager Survey for April.

The proportion of global investors saying equity markets are overvalued has reached its highest level since 2000. A net 25 per cent of respondents to the global survey say that global equities are currently overvalued, up from a net 23 per cent in March and a net 8 per cent in February. This is still, however, short of the record-high level of a net 42 per cent in 1999.

At the same time, the proportion of respondents saying that bond markets are overvalued has reached a new high in the survey’s history. A net 84 per cent of the global panel says that bonds are overvalued, up from a net 75 per cent in March. At the same time, 13 per cent believe that “equity bubbles” are the biggest tail risk markets are facing, up from 2 per cent in February.

Global respondents believe that the focus of overvaluation is on the US – a net 68 per cent of the panel says that the US is the most overvalued region globally. Global panelists believe that all other regions, including Europe and Japan remain undervalued.

These assessments come as investors increasingly accept that US rates will rise at a time when the European Central Bank and the Bank of Japan are engaged in monetary stimulus. Although a majority of investors expect no Fed hike before the third quarter, 85 per cent expect a rate rise to take place this year.

“April’s survey offers further proof that global investors are front-running global monetary policy,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Research. “We are seeing a form of rational exuberance in Europe where a positive view on stocks is supported by fundamentals – but investors no longer believe valuations are cheap,” says Manish Kabra, European equity and quantitative strategist.

Faced with the prospect of the Fed starting to tighten monetary policy, investors believe that currencies face higher volatility. Eighteen per cent of the global panel says that currencies is the asset class most vulnerable to volatility, a rise of 5 percentage points since March.

More investors say the dollar is overvalued against the euro and the yen. The proportion of respondents saying the US dollar is overvalued has risen to a net 13 per cent – a big swing from February when a net 12 per cent took the view the dollar is undervalued.

A net 8 per cent believe the euro is undervalued this month, compared with a net 24 per cent saying it was overvalued two months ago. A small majority of the panel (a net 2 percent) now believes the yen is undervalued, compared with a net 12 per cent saying it was overvalued two months ago. Despite their view on valuations, however, a majority of investors still expect the dollar to appreciate, and the euro to depreciate, in the coming year.

Edge has come off the euro exuberance

The highs of euro-mania seen in March have eased, but European equities retain much of their allure in April’s survey. A net 46 per cent of asset allocators remain overweigh eurozone equities, down from a record net 60 per cent in March. A net 37 per cent of investors say the eurozone is the region they most want to overweight in the coming 12 months, though this too is down from a net 63 per cent in March.

The regional survey shows that Europeans have changed their perspective on valuation. A net 10 per cent say that European equities are overvalued this month, up from a net 3 per cent taking the view they were undervalued in March. However, a net 73 per cent expect better corporate profits in the next year, up from a net 69 per cent last month.

Japan also remains in favour. While the proportion of asset allocators overweight Japanese equities ticked down two percentage points over the month to a net 38 per cent, the reading remains the fourth-highest since 2006. Furthermore, the proportion of investors seeking to overweight Japan in the coming year rose to a net 22 per cent from a net 10 per cent.

While asset allocators are currently favouring growth sectors such as Technology and Discretionary, global investors have indicated that they will start prioritising value over growth investing. The survey shows a spike in the proportion of panelists predicting that “value” will outperform “growth” in the coming year – up to a net 25 per cent from a net 6 per cent in March. The shift is even more pronounced among European investors responding to the Regional Survey. A net 17 per cent say that value will outperform growth this month, compared with a net 22 per cent taking the opposite view in March, a monthly swing of 39 percentage points.

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