BofAML Survey: Investors' Risk-taking Has Hit An All-time High
Federal Reserve balance sheet reduction impacted views
Fund managers are showing signs of 'irrational exuberance' by increasing their overweight global equities positions and decreasing cash weightings, according to the latest Bank of America Merrill Lynch (BofAML) survey.
The November survey, which consisted of 209 panellists, found allocations to global equities had increased to net 49% overweight, the highest level since April 2015.
Furthermore, average cash balances of portfolios fell to 4.4% from 4.7% last month, the lowest level since October 2013 and below the 10-year 4.5% average, while the net share of investors taking out protection against a correction in markets decreased this month to -37%.
The 'Goldilocks' scenario, a combination of low inflation and strong growth, has become the "consensus" view for the global economy, with 56% of investors predicting above-trend growth and below-trend inflation.
However, the survey also found net 48% of investors believe equities are overvalued, while net 16% think they are taking above-normal levels of risk with their investments, a record high.
Michael Hartnett, chief investment strategist at BofAML, said: "Icarus is flying ever closer to the sun and investors' risk-taking has hit an all-time high. A record high percentage of investors say equities are overvalued yet cash levels are simultaneously falling, an indicator of irrational exuberance."
Central bank action was highlighted as the biggest tail risk to markets with 27% of respondents believing a policy mistake from the Federal Reserve or European Central Bank could cause a correction.
In particular, the impact of the Fed's $4.5trn balance sheet reduction and ECB halving its monthly bond purchases from €60bn to €30bn-a-month divided investors with 42% expecting lower stock prices and 35% predicting stocks to go higher.
The other headwinds which investors pointed to was a crash in global bond markets and a flash crash caused by "market structure", which 22% and 13% of investors saw as the two biggest risks respectively.
In addition, allocations to UK equities returned to levels last seen during the Global Financial Crisis, with pessimism towards UK equities rising to net 37% underweight.
Ronan Carr, European equity strategist at BoAML, commented: "UK sentiment is severely depressed and remains the least popular country market for European investors."
Following a strong earnings season, the survey found investors were net 23% overweight Japanese equities, the highest level in two years.
Shusuke Yamada, chief Japan FX/Equity strategist at BoAML, said: "Global fund managers see the profit outlook in Japan as favourable amid a strong earnings season.
"Investors continue to see Japan equities as undervalued relative to other markets and say they want to overweight Japan for the next 12 months."
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