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Record high 34% of managers see equities as overvalued, BofA Merrill Lynch finds

A record number of money managers believe equities are overvalued, said Bank of America Merrill Lynch’s monthly fund manager survey released Tuesday.

A net 34% of managers said equities are overvalued, the highest reading in the 17 years that question has been asked, and up from a net 26% in February.

Broken out by region, a net 81% of investors identified the U.S. as the most overvalued region, up from a net 78% last month, while a net 44% and 23% believe emerging markets equities and eurozone equities, respectively, are undervalued, compared to 49% and 24% last month.

According to the March survey, a net 32% of money managers think the U.S. dollar is overvalued, the highest reading since June 2006, and up from a net 28% in February, while a net 20% believe the euro is undervalued, the highest reading since December 2002, and up from a net 15% last month. Going long on the U.S. dollar also remains the most crowded trade, according to 39% of investors, compared to 41% last month.

Average cash holdings, meanwhile, fell to 4.8% of managers’ portfolios in March, down from 4.9% in February, but still above the 10-year average of 4.5%.

A net 58% of survey respondents expect the global economy to improve over the next year, down slightly from a net 59% in February, the March survey also found. Additionally, a net 80% expect a higher global consumer price index over the next year, while a net 57% believe global profits will improve over the next year, compared to a net 81% and 55%, respectively, last month.

European elections raising the risk of disintegration of the European Union remains the biggest tail risk, according to 33% of investors (compared to 36% last month), followed by trade at 20% (32%). and a crash in global bond markets at 18% (13%).

Other findings from the March survey include:

  • Global equity allocations rose to a net 48% overweight in March, the highest reading in almost two years, and up from a net 39% overweight in February, while bond and commodity allocations fell to a net 65% underweight and 1% overweight, respectively, compared to a net 59% underweight and 3% overweight last month. March’s bond allocation is the lowest reading in more than three years.
  • U.S. equity and U.K. equity allocations fell to a net 1% overweight and 30% underweight, respectively, compared to a net 13% overweight and 24% underweight last month, while eurozone equity, emerging markets equity and Japanese equity allocations rose to net overweights of 27%, 18% and 22%, respectively, up from a net 23% overweight, net 5% underweight and a net 20% overweight last month.
  • A net 11% of investors expect a stronger Chinese economy over the next 12 months, the highest reading since September 2013.
  • 36% of money managers cited higher interest rates as the catalyst most likely to end the eight-year equities bull market. Last month, protectionist policies were cited as the most likely catalyst.

“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,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, in a news release about the survey results. “Policy is the key catalyst for the Icarus trade to fly higher in the coming months.”

The survey of 200 money managers representing $592 billion in assets under management was conducted March 10-16.