With the stock market coming into November with another strong gain for the S&P 500 – the market was up for the statistically improbable 12th month in a row in October – investors are becoming aware of the increased risk exposure. According to a Bank of America Merrill Lynch Global Fund Manager Survey released Tuesday, a record number of investors are exposed to “higher than normal risk.”
Nearly half of all stocks overvalued as central bank "tail risk" on top of investor minds
When looking at the recent string of consistent investment gains, Bloomberg’s Victor Haghani and James White note that such win streak consistency has a 1% potential based on past results dating back to 1871. The numbers get a little fuzzy depending on how random walk analysis is conducted. But when looking at BAML’s recent survey statistics other anomalistic behavior is apparent.
The net percentage of equities that are overvalued is at a record high of 48%, the survey noted, but oddly this comes amid a divergence with falling cash levels. This leads BAML’s Chief Investment Strategist Michael Hartnett to see signs of “irrational exuberance.”
Investors in the survey are long banks and the Eurozone while short the UK and consumer staples, the report noted as long Nasdaq has emerged as the “most crowded trade,” surpassing long Bitcoin in the September survey.
When looking at the potential for the biggest “tail risk,” investors are concerned that withdrawing the dependent market stimulant via a Fed/ECB policy mistake is the number one concern, the same as the October survey. Adding to the list this survey is a global “crash” in bond prices, a “market structure” issue such as a flash crash, a Nasdaq bubble and failure of US Tax reform.
With 81 percent of investors surveyed saying bond markets are overvalued, near a record high, BAML expresses concern. “If you see further weakening in bond markets, particularly credit bond markets or corporate bond markets, it's going to have a negative impact on stock markets," Michael Hartnett, chief investment strategist at BofAML, told CNBC. "The catalyst has to be inflation, especially wage inflation."
Fewer investors see need for market stimulus, but biggest concern is central bank policy mistake
In light of the perceived risks, hedge fund net equity exposure is reported at an 11 year high of 47% as fewer are hedging against risk, the report noted.
The “Goldilocks” view of the world is taking hold and is now the consensus with nearly 36% of respondents expecting stronger economic growth. Corporate profit expectations remain high as the impact of tax reform is likely to be inflationary or result in no change on the macro outlook, the two top responses in the survey. The Goldilocks scenario was the third most popular response.
Looking at risks to corporate profits, rising wages were far and away the largest concern, at 30%. Rising interest rates were the concern of 21% of respondents while protectionist and redistribution policies in the wake of populism was a concern of 16% of respondents.
Not on this list of risks were the leveraged state of corporate balance sheets, with 23% of respondents saying they corporates are overleveraged, a record high.
With fully 77% of investors surveyed saying interest rates are rising, there are fewer and fewer who see the value in stimulus. As the yield curve flattens the percentage of investors saying the stimulus is not needed is the highest since 2015.
Most investors surveyed were overweight US, Japanese and Eurozone equities while technology and the banks had the best sentiment figures, while utilities and telecoms were the least loved.