BofAML Survey: Overvaluation Fears Rise As U.S. Profit Expectations Plummet

Aug 15 2017 | 10:51pm ET

A record 46% of global investors believe equity markets are overvalued, according to Bank of America Merrill Lynch’s most recent monthly fund manager poll, while cash levels remain elevated at 4.9% in the U.S. 

The survey of 202 asset managers managing some $587 billion in AUM was taken between August 4-10, according to a Reuters article. It also revealed global manager allocations to equities have fallen to a net 36% overweight. Cash levels at European managers reached 5.3% in the poll, the highest level since March 2003.

Ominously, BofAML’s survey also revealed profit expectations are falling. Only a net 33% of the investors polled believe corporate profits will improve over the next 12 months, down sharply from January’s reading of 58%, and the lowest level since November 2015.

The data suggests investors could shift from equities to bonds, and within fixed income, from junk to investment grade, as risk appetite fades. Moreover, cyclical equity sectors are vulnerable compared to defensive ones, the Reuters article added.

Further raising concerns were survey readings suggesting U.S. stock allocations at a net 22% underweight, the largest underweight reading since January 2008, and the lowest relative U.S equity positioning since April 2007.

On the bright side, 42% of the poll respondents continue to expect an economic scenario characterized by above-trend growth and below-trend inflation, a record level. This “goldilocks” scenario has been supported lately by low inflation readings. Interestingly, BofAML’s latest survey contained a new question in which 43% believe persistently low inflation readings are structural in nature. 

And what are the largest tail risks? According to the survey respondents, a policy mistake by the Fed or ECB, at 22%, and escalation of the North Korean situation, at 19%.

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