Investors see growing overvaluations in equities and bonds and have signaled 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 percent of respondents to the global survey say that global equities are currently overvalued, up from a net 23 percent in March and a net 8 percent in February. This is still, however, short of the record high level of a net 42 percent 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 percent of the global panel say that bonds are overvalued, up from a net 75 percent in March. At the same time, 13 percent believe that “equity bubbles” are the biggest tail risk markets are facing, up from 2 percent in February.
Global respondents believe that the focus of overvaluation is on the U.S. – a net 68 percent of the panel say that the U.S. 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 U.S. 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 percent expect a rate rise to take place this year.
“April’s survey offers further proof that global investors are forecasting 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,” said Manish Kabra, European equity and quantitative strategist.
Investors signal concerns over dollar valuation
Faced with the prospect of the Fed starting to tighten monetary policy, investors believe that currencies face higher volatility. Eighteen percent of the global panel say 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 U.S. dollar is overvalued has risen to a net 13 percent – a big swing from February when a net 12 percent took the view the dollar is undervalued.
A net 8 percent believe the euro is undervalued this month, compared with a net 24 percent 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 percent 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 percent of asset allocators remain overweight Eurozone equities, down from a record net 60 percent in March. A net 37 percent 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 percent in March.
The regional survey shows that Europeans have changed their perspective on valuation. A net 10 percent say that European equities are overvalued this month, up from a net 3 percent taking the view they were undervalued in March. However, a net 73 percent expect better corporate profits in the next year, up from a net 69 percent last month.
Japan also remains in favor. While the proportion of asset allocators overweight Japanese equities ticked down two percentage points over the month to a net 38 percent, 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 percent from a net 10 percent.
Shift towards value over growth?
While asset allocators are currently favoring growth sectors such as Technology and Discretionary, global investors have indicated that they will start prioritizing 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 percent from a net 6 percent in March. The shift is even more pronounced among European investors responding to the Regional Survey. A net 17 percent say that value will outperform growth this month, compared with a net 22 percent taking the opposite view in March, a monthly swing of 39 percentage points.