When we summarized the latest batch of 13F reports this morning, we found that in the first quarter the who-is-who of brand name hedge funds scrambled to buy up the big 6 tech stocks: Facebook, Apple, Amazon, Microsoft, Alphabet and Netflix, which is either the cause or effect of a 26% average return for these 6 names, and which together are accountable for nearly half of the YTD gains of the S&P according to Goldman calculations.
Ironically, it has not escaped Wall Street that with few other trades working, everyone else on Wall Street was also buying the same handful of stocks, which in turn has made Wall Street quite nervous.
That is the finding from the the latest monthly BofA Fund Manager Survey, according to which the most crowded trade is no longer being long the US Dollar, which has dropped to third place after the recent rout in the greenback, but being "long the Nasdaq" which some 26% of the 213 managers who took part in the survey said is the latest and greatest "hedge fund hotel" trade currently; it was followed in distant second place by "Long European Equities."
Until May, owning the U.S. dollar had been the most in-consensus pick for five months in a row. The streak began in the wake of November's election amid hopes that pro-growth economic priorities from the Trump administration might spur the economy and higher bond yields, and push the dollar higher. Instead, the dollar has now given up all post-election gains.
Also not surprising is that in light of the recent euphoria for European risk exposure, being "Long European Equities" is now the second most crowded trade, something JPM also touched upon yesterday when it noted that further gains for European equities are limited and urged to go short Europe.
Incidentally, the same survey also showed that respondents were correct: according to BofA, the survey participants indicated that their allocation to European stocks has surged to the highest since March 2015, and is now the third highest on record.
Also of note: despite chasing both European and Tech exposure, the same survey showed that the number of respondents who believe the market is now overvalued is the highest in 17 years.
And where is this overvaluation the highest? Why in the US of course.
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So with markets massively overvalued, and everyone clustered into the same trade, what did Wall Street think is the biggest tail risk for the month of May? The answer: a Chinese credit tightening... which may explain why overnight China injected the most cash into its banking system in four month.
And something curious: May 2017 was the first time China emerged - in some capacity - as the biggest tail risk according to Fund managers, replacing months of worries about European disintegration and fears about a Trump victory. In fact, the last time everyone was worried about China was back in January 2016 when the global capital markets were tumbling, and only the "Shanghai Accord" in February of 2016 prevented what at the time seemed to be a near certain recession.
Here are all the key findings from this month's fund manage survey:
- Investors’ macro expectations find global economy to be just right, with a record high 34% citing a Goldilocks scenario of high growth and low inflation
- China replaces European disintegration as the most commonly cited tail risk for the first time since January 2016, with 31% of global fund managers citing Chinese credit tightening as the biggest risk in the market
- Long Nasdaq is seen as the most crowded trade for the first time, knocking long U.S. dollar off the top spot after five months; despite this, net 23% of investors still say the USD is overvalued
- Profit expectations are at a three-year high as net 56% of respondents say global profits will improve over the next 12 months
- FMS cash levels remain unchanged from April at 4.9%, still above the 10-year average of 4.5%
- Investors’ views on valuation continue to vary by region: net 82% of fund managers think the U.S. is the most overvalued region, near April’s all-time high; meanwhile, Eurozone and EM equities are seen as undervalued, at net 20% and net 44% respectively
- Net 59% of investors are overweight Eurozone equities, up from net 48% overweight in April and the highest allocation since March 2015
- Allocation to UK equities rises to a net 27% underweight versus net 34% underweight last month
- Japan equity allocation fell for the second month to a net 12% overweight as investors increase their allocation into European equities
- But irrationality is not yet visible despite all-time highs in credit and equity markets, robust global EPS and a benign French election result.
- Allocation to Eurozone equities is at its third highest level on record. The recent outperformance seems due for a pause, especially versus the U.S.
- Although global investors’ allocation to Japanese equities declined for a second month; easing risk factors, better currency levels, and fundamentals hint of a possible summer rally.