BofA-ML strategists cautious as fund managers chase markets higher
"Icarus is flying ever closer to the sun," Bank of America-Merrill Lynch's chief investment strategist said, pointing to signs of 'irrational exuberance' among investors in the investment bank's latest global survey of fund managers.
"Investors' risk-taking has hit an all-time high. A record high percentage of investors say equities are overvalued yet cash levels are simultaneously falling, an indicator of irrational exuberance," said Michael Hartnett.
Indeed, according to the latest FMS average cash balances fell from 4.7% in October to 4.4% in November - their lowest level since October 2013 - as asset managers chased markets higher.
Cash balances were now also below their 10-year average of 4.5%.
Meanwhile, the net proportion of investors who were taking out protection against the risk of a 'correction' in stocks was at -37%, yet a record high net 48% said equities had become 'overvalued'.
According to a net 34% of the same fund managers, 'long-Nasdaq' had become the most crowded trade.
On the other side of the ledger, pessimism towards UK shares was again at lows seen during the last financial crisis, at a net 37% 'underweight', the FMS revealed.
Would stocks drop as the US Federal Reserve trimmed its balance sheet and the European Central Bank moved to taper?
On that point investors were divided, with 42% expecting shares to drop and 35% expecting further gains, BofA-Merrill said.
"Investors eye central banks, with 27% of those surveyed indicating the biggest tail risk to the markets is a policy mistake from the Fed/ECB; the top three are rounded out by a crash in global bond markets (22%) and a flash crash caused by "market structure" (13%)."