Although investors have moved past "peak pessimism" with cash levels dropping while risk appetites are rising, investor optimism is "fragile, neurotic, (and) nowhere near dangerously bullish," said results of Bank of America Merrill Lynch's June Global Fund Manager survey.
The survey reveals that a record net 78% of fund managers believe that the stock market is "overvalued," the highest since 1998.
Just 18% of respondents expect a V-shaped recovery, vs. 64% who foresee the recovery to be U- or W-shaped. While 37% now say we're in a bull market, 53% still say it's a bear market rally.
June cash levels among fund managers are down to 4.7% from 5.7% in May, the biggest drop since August 2009. Meanwhile, hedge fund net equity exposure among survey respondents rose to 52% from 34%, the highest since September 2018.
The fund manager survey forecasts 10-year annualized equity returns to be just 3.4%.
Respondents believe supply chain reshoring is the biggest post-COVID-19 structural shift, at 68%; followed by protectionism (48%) and higher taxation (43%). Also in a post-COVID-19 world, investors want CEOs to improve balance sheets first (65%), raise capital expenditures second (23%) and buy back stock last (just 5%).
A second wave of the coronavirus tops the list of biggest tail risks for fund managers, with permanently high unemployment at No.2, followed by a Democratic sweep in the 2020 election and a trade war with China.