Equities At Most Overvalued Point In 17 Years - BoA Merrill Lynch Poll

Tom Burroughes

22 March 2017

Fund managers around the world say equities are at their most overvalued level in 17 years, with the US seen as the most expensive while emerging market and European equities are seen as cheap, according to the March edition of the monthly survey by .

The survey, carried out from 10 to 16 March and covering 200 panellists with $592 billion in assets, showed investors have already begun deploying cash. Cash levels in portfolios fell to 4.8 per cent in March from 4.9 per cent in February, but they are still higher than the 10-year average of 4.5 per cent.

“Investor positioning argues for a risk rally pause in March/April, with allocation to equities at a two-year high and bond allocation at a three-year low,” Michael Hartnett, chief investment strategist, said. “Policy is the key catalyst for the Icarus trade to fly higher in the coming months.”

A record number of investors (net 34 per cent of respondents) said equities were overvalued. (A net figure is produced by subtracting negative views from positive ones.) The US is identified as the most overvalued region (net 81 per cent), while emerging market equities (net 44 per cent) and eurozone equities (net 23 per cent) are seen as undervalued.

Investors view higher interest rates (36 per cent) rather than weaker earnings (21 per cent) as the catalyst most likely to end the eight-year bull market in equities. A fear of protectionism (21 per cent) was less severe than in February.

Bond yields are currently too low to hurt equities and some 67 per cent of fund managers surveyed said 10-year Treasury yields of 3.5 per cent to 4 per cent are needed to tip equities into a bear market phase.

Fund managers see the possibility of a crack-up of the European Union, caused possibly by elections this year (there are polls in France and Germany), as the largest “tail risk” (33 per cent), followed by the risk of a global trade fight (20 per cent) and a crash in global bond markets (18 per cent).

A net 32 per cent of investors think the US dollar is overvalued, the highest proportion since June 2006; long dollar is once again seen as the most crowded trade (39 per cent).

A net balance of 58 per cent of respondents expect there to be faster economic growth this year, the poll found.