There is something ironic in the latest monthly Fund Manager Survey from Bank of America. On one hand, a net of 34% of survey respondents said equities now the most overvalued in the past 17 years, in other words either fund managers were still in middle school when it happened and don't recall the 2000 dot com bubble, ofparadr they do, and are confident that the current market is an even greater bubble.
Yet on the other hand, despite admitting stocks are the most overvalued since Y2K, managers admitted that their allocation to equities was up sharply in March, and at net 48%, was the highest in two years, with the current allocation 0.8 standard deviations above the long-term average.
Paradoxically despite this "dancing chairs" situation, FMS report that their cash balance is still a comfortable 4.8%, down from 4.9%, above the 10 year average of 4.5%, and suggesting that the epic liquidity glut courtesy of central banks continues to reverberate among markets. Perhaps some of the cash was freed as a result of the allocation to bonds falling to net 65% underweight from net 59% underweight last month, the lowest in more than three years
And since it is a new month, it means the respondents have a new list of what they believe are the most crowded trades currently. The answer shows few changes from last month, with investors saying that the most crowded trades in March were: Long U.S. dollar (39%), long banks (16%), short government bonds (15%)
Some other notes on the latest report:
- Changes to global investor positioning from February survey include: rotation out of U.S., energy, bonds and U.K.; rotation into emerging markets, utilities, staples, broad equities
- Biggest ‘tail risks’: European elections raising disintegration risk (33%), trade war (20%), crash in global bond markets (18%)
- Yields remain too low to hurt stocks: 67% say 10-year Treasury yields of 3.5%-4% needed for an equity bear market
Finally, some thoughts from BofA:
- End of the bull: higher rates (35%) rather than weaker EPS (21%) seen as bear market catalyst; but no fear yet from "synchronized" monetary tightening in '17...majority (36%) say >3.5% yield on 10-year Treasury needed for equity bear market.
- FMS Positioning data argues for March/April risk rally "pause": stocks deemed most "overvalued" since 2000; equity allocations up to 2-year high, bond allocations down to 3-year low; our FMS Macro Rule flips from "buy" to "neutral".
- Bottom line: March FMS shows investor sentiment in a "bullish holding pattern"; cash can fund H1 upside but FMS Positioning & Profits argue for March/April risk rally "pause"; Policy the key catalyst for "Icarus trade" to fly higher in coming months.
- "Stay long" says cash: FMS cash down to 4.8% (from 4.9% in Feb), still above 10-year avg of 4.5%, FMS Cash Rule still says "buy"; Bull & Bear index @ 6.9, i.e. not yet extreme bullish enough (>8.0) to trigger contrarian "sell signal".
- Profits need tax cuts: "secular stagnation" view falls to 5½-year low; global EPS expectations at 7-year high; further profit momentum needs tax cuts/infrastructure ...good news is very few (10%) expect US tax reform to be passed before summer recess.
- EM the tactical long of spring: USD overvaluation highest since Jun'06; hence big March rotation away from US equities (81% say US market overvalued) to EM equities (aided by big jump in FMS China growth expectations).
- FMS crowded trades: long USD (39%), long Banks (16%), short government bonds (15%); big March rotation to EM, utilities, staples; away from US, energy; investors are very short Euro, sterling, UK stocks, and very long banks, US dollar (Exhibit 1).
- Best favoured March FMS contrarian pair trade: short discretionary, long pharma; more broadly bears would sell banks, US dollar, Japan and buy bonds, staples, utilities; bulls would sell REITs and buy the euro, energy, UK.
Finally, here is a simpler representation of the above: