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World stocks seen as most overvalued in 17 years: BAML survey
[LONDON] World stocks are their most expensive in 17 years, but bond yields will need to be much higher than they are currently to trigger an equity bear market, a monthly fund manager survey showed on Tuesday.
Bank of America Merrill Lynch's (BAML) poll of investors managing US$592 billion worldwide was conducted from March 10-16, a period that saw Wall Street's recent string of record highs fizzle out and the Federal Reserve raise US interest rates.
Global investors' allocation to stocks hit a two-year high, according to the poll, with a net 48 per cent now overweight the market.
A net 34 per cent of fund managers now thing equities are overvalued, the highest proportion since 2000, BAML said.
Regionally, the US stock market is the most overvalued, according to 81 per cent of respondents. A net 44 per cent think emerging market stocks are undervalued, while a net 23 per cent say the same about euro zone equities.
The biggest risk to the equity bull market will come from higher interest rates, reckon 35 per cent of respondents, rather than weak company earnings (21 per cent).
A net 36 per cent said the 10-year US Treasury yield will have to rise above 3.5 per cent before a bear market in stocks ensues. The yield has risen sharply since mid-2016 but has struggled to rise above 2.5 per cent. The last time it was higher than 3.5 per cent was six years ago.
The Fed raised rates last week and is on course to tighten further this year. But investors are sceptical growth and inflation will be strong enough to warrant a sustained series of hikes, and longer-fated yields have slipped as a result.
The drift lower in yields has pulled the dollar down with it. A key measure of the dollar's trade-weighted value hit a six-week low on Tuesday.
According to BAML's survey, the dollar is its most overvalued since June 2006 and long dollar positions were once again far and away the most 'crowded trade' in world markets.
Despite the extreme pricing in stocks and the dollar, investors are confident neither is in bubble territory, and that economic growth and profits will continue to rise.
A net 57 per cent of those polled said global profits will improve over the coming year, up from 55 per cent in the last month's poll and close to a seven-year high, BAML said.
European elections leading to euro zone disintegration remained the biggest 'tail' risk to world markets followed by a global trade war, although both risks diminished from February. The proportion of those polled who think a global bond market crash is the biggest risk rose to 18 per cent from 13 per cent.