Fund managers are becoming pessimistic about the outlook for
risk assets, with 46 percent claiming equity markets are
overvalued, according to a new survey.
Fund managers are hedging risk exposures and stockpiling
cash as asset management firms grow increasingly downbeat about
the prospects for global equities in the year ahead.
The latest Bank of America Merrill Lynch Fund Manager Survey
of 200 fund managers, conducted each month, found that 46 per
cent of respondents think equity markets are now overvalued
a record high for the survey. Only a third are expecting
corporate profitability to improve over the coming year.
In a note accompanying the report, Michael Hartnett, chief
investment strategist at Bank of America Merrill Lynch, said
stock market investors expectations of corporate profits
have taken an ominous turn this year. He said this
was a warning sign for those who had embraced
equities over bonds, high yield over investment grade,
and cyclical sectors over defensive ones. Hartnett added
that any further deterioration would likely trigger risk-off
The report follows similar warnings from fund managers and
other market observers about the outlook for riskier assets,
with managers repeatedly noting that investors are locking in
gains and reducing risk.
[II Deep Dive: Fund Managers to Investors: Be Afraid]
At least one famous fund manager disagrees. In a telephone
interview with CNBC on Tuesday, Appaloosa Management founder
David Tepper said that while he doesnt think stocks are
screaming cheap, he does think past comparisons to
overvalued stock markets --such as the equity market of
1999, before the dotcom bubble burst -- are
ridiculous and that the U.S. stock market is
nowhere near overheated. To that end, Tepper ramped
up his exposure to technology stocks to nearly a quarter of his
stock portfolio at the end of the second quarter, according to
The BofA Merrill survey found that managers perceive the
two biggest potential risks to the market to be a policy
mistake by the U.S. Federal Reserve and a crash in global bond
markets. Twenty two percent of investors cited the former as
the biggest risk, while 19 percent cited the latter.
In a note to clients, Christian Preussner, chief client
portfolio manager for U.S. equities at J.P. Morgan Asset
Management, said stocks have been climbing a wall of
worry since 2009 and acknowledged that there is
fear that a correction is overdue. He added that for
investors concerned about the possibility of a correction,
defensive stocks and strategies that are less correlated to the
equity markets are sensible investments.
The BofA Merrill survey found that European fund managers
are increasing their cash stockpiles as a result of concerns
that stocks may be on the expensive side, with cash
representing 5.3 percent of portfolios, the highest level since
March 2003. Globally, the average cash balance was 4.9
The survey also found that 31 percent of fund managers think
the most crowded trade is that of investors positioned for a
rising Nasdaq. This is the fourth month they have made this
conclusion, the survey noted.
Fund managers and investment advisers have been sounding
concerns that some portfolios may be carrying more risk than
anticipated, with investors having allocated more to high-yield
credit in recent years to achieve a better yield.
John Burke, head of institutional business at Royal London
Asset Management, tells Institutional Investor that savvy
investors realize that going further out on the risk spectrum
carries risk. What worries me is that [some] people
dont understand the risks that they are taking, he