The latest monthly Fund Managers (FMS) survey from Bank of America is out, and continuing the trend noted in previous months when the number of active managers who said that stocks are overvalued hit the highest in nearly two decades, the latest version reveals that the number of respondents saying that equities are overvalued has just hit a record high, surpassing the all time high set during the 1999 bubble. As shown in the chart below, 44% of fund managers now say equities are overvalued, the highest response on record, and up from 37% in May.
Meanwhile, “excess valuation” concern coincide with high global profit expectations – just like prior to the 2000 recession – “shows that market vulnerability to profit weakness is very high” according to BofA.
Not surprisingly, 84% of investors think US is the most overvalued region, a new all-time high, while a net 18% think European equities are undervalued and a net 48% of investors think EM equities remain undervalued.
Meanwhile, even as the market rose to record highs, FMS cash “on the sidelines” rose from 4.9% to 5.0% in May according to BofA, which is well above the average cash level over the past decade of 4.5%. avg.
BofA suggest that while ominous on the surface, and in contrast to the 1999 bubble, the record June FMS views of “excess valuation” does not coincide with a fall in cash levels, which to BofA’s Michael Hartnett suggests there is no irrational exuberance. Then again, this time the exuberance appears to be manifesting itself via passive investing and ETFs, as well as vol bets, so it is unclear if such comparisons are appropriate.
Asked for their opinion on internet stocks, 75% said internet stocks expensive or in bubble, with 57% of investors saying “expensive”, 18% “bubble-like”, 15% “fair”, 1% say “cheap.
Related to this, respondents said that the #1 “crowded trade” in June is long Nasdaq, even more so than in May, jumping from 26% to 38%, while #2 is long EU equities, and #3 long US/EU corporate bonds.
The monthly evolution of the “most crowded trade” according to the market is shown below:
Asked what they see is the biggest tail rise, active managers responded “China Credit Tightening” the second month in a row, with crash in global bond markets second (18%); followed by delay in U.S. corporate tax reforms (14%)
This is how the “biggest tail risk” has evolved over time:
64% say 10-year Treasury yields of 3.5%-4.0% needed for an equity bear market
More ominously, when asked about global growth expectations, only 39% macro momentum has peaked; vs vs 62% in January, “so June FMS sees defensive rotation to staples, utilities + largest drop since Jun’10 in allocation to commodities.”
And related to that, “contrarian bond bulls” are on the rise, with just 9% of FMS respondents forecast lower/flat bond yields last Dec, now 20% do. At the same time, inflation expectations have also continued to fall, to 60% from 75% in April, suggesting the global economy has indeed peaked as UBS showed yesterday.
Finally, in another notable inflection point, while those expecting a “goldilocks” outcome has risen to a new record highs at 38%, those expecting “secular stagnation” has also risen to 46%, from 41% in May, confirming just how split the outlook on the economy the market remains.