A record number of money managers said equities and bonds are overvalued, said Bank of America Merrill Lynch's monthly fund manager survey released Tuesday.
A net 54% of managers said equities and bonds are overvalued, compared to 52% in August. The equity reading is the highest overvaluation reading since May 2000.
Money managers’ cash holdings also remain high. Average cash holdings rose to 5.5% of managers' portfolios in September, up from 5.4% in August.
When asked why their cash levels were so high, 42% of managers cited a “bearish view on markets” and 20% a “preference for cash over low-yielding equivalents,” according to the survey report.
Managers’ global, U.S., U.K. and Japanese equity allocations all fell in the month. Global equity was a net 1% overweight (vs. 9% overweight last month); U.S. equity was a net 7% underweight (vs. 11% overweight); U.K. equity, net 24% underweight (vs. 21% underweight); and Japanese, net 8% underweight (vs. 1% underweight).
Meanwhile, eurozone equity and emerging market equity allocations improved to net overweights of 5% and 24%, respectively, from net overweights of 1% and 13% in August. The emerging market equity reading is the highest overweight reading in 3.5 years.
Global bond and commodity allocations fell to net underweights of 45% and 8%, respectively, in September, down from net underweights of 43% and 4% in August.
The survey’s other key findings include:
- Hedge funds’ stock exposure rose to 44% in September, its “highest level since the May 2013 ‘taper tantrum,’ underscoring the market’s vulnerability to a bond shock,” said a news release on the survey results.
- 83% of managers surveyed believe the Bank of Japan and European Central Bank will maintain negative interest rates over the next 12 months, compared to 87% in August.
- Global growth expectations are improving — a net 26% of investors expect the global economy to improve over the next year, the highest reading in nine months and up from a net 23% last month. Also, a net 16% expect global profits to improve over the next year, the highest reading in nine months and up from a net 11% in August.
- European Union disintegration was cited as the biggest tail risk by 23% of managers, up from 22% in August, followed by a Republican win in the White House at 22% and renewed China devaluation at 15%.
“Investors see an unambiguous vulnerability to ‘bond shock’ among risk assets, with the most crowded negative interest trades and (emerging markets) equities susceptible should the Fed and especially the BoJ fail to reduce bond volatility in September,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, in the release.
The survey of 208 money managers representing $579 billion in assets under management was conducted Sept. 2-8.