Global investors continue to pile cash into stocks this month, according to the most recent Bank of America Merrill Lynch survey of fund managers, and fewer are preparing for a market correction even as a record number consider equities to be overvalued.
Nearly half of the 178 investment managers who run more than half a trillion dollars worth of assets indicated that stocks are likely too expensive, the November survey showed, but curiously noted that a further record high 16% said they're taking "above normal" levels of investment risk in their portfolios. That would reflect the broader consensus (56%) in the benchmark poll that calls for above trend growth and below trend inflation in the coming months, a so-called 'Goldilocks' scenario that should continue to support global equity prices.
"Icarus is flying ever closer to the sun and investors' risk-taking has hit an all-time high," said Michael Hartnett, BAML's chief investment strategist. "A record high percentage of investors say equities are overvalued yet cash levels are simultaneously falling, an indicator of irrational exuberance."
Tech stocks, however, remain a concern for investment managers, with 34% saying for the sixth time this year that a long position in the Nasdaq is November's most-crowded trade, followed by short positions in equity volatility (26%) and high yield corporate bonds (18%). The survey also noted that cash balances in global portfolios continued to decline, falling to an October 2013 low of 4.4% and just below the survey's ten-year average.
In terms of broader risks, investors agreed that central bank mis-steps were likely the most significant, but were split as to the ultimate impact of the Federal Reserve's balance sheet reduction for the European Central Bank's quantitative easing tapering would have one stocks: 42% thought the impact would be bearish, while 35% said it would likely be bullish.
In geographic terms, investors were most concerned about developments in the United Kingdom, linked to the economic impact of the country's decision to leave the European Union, with a net 37% of respondents indicating they were underweight British stocks.
"UK sentiment is severely depressed and remains the least popular country market for European investors," said European equity strategist Ronan Carr.
Japanese stocks were once again an attractive option, however, according to the survey, as the Nikkei 225 surged to a 26-year high amid renewed fiscal and monetary support under the cemented leadership of Prime Minister Shinzo Abe.
"Global fund managers see the profit outlook in Japan as favourable amid a strong earnings season," said Shusuke Yamada, chief Japan FX/equity strategist. "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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