Equities most overvalued in 17 yrs; market rally to pause in April: BofA-ML

Global equities are most overvalued in the past 17 years, suggests a recent Bank of America-Merrill Lynch Fund Manager Survey for March, with a net 34% of the respondents agreeing to this. Despite this, allocation to equities in March hit a two-year high with a net 48% of the fund managers remaining overweight on the asset class. The current allocation is 0.8 standard deviation above its long-term average.

Among regions, 81% of leading global fund managers think US is the most overvalued; while a net 44% believe emerging market (EM) equities remain undervalued, followed by net 23% who think euro-zone equities are undervalued.

An overall total of 200 panellists with $592 billion of assets under management (AUM) participated in the survey during March 10 - 16, 2017. 165 participants with $505 billion of AUM responded to the global fund manager survey questions (FMS) and 92 participants with $213bn AUM responded to the regional FMS questions.

Investors identify higher interest rates (36%) rather than weaker earnings (21%) as the catalyst most likely to end the eight-year bull market in equities, the BofA-ML survey says. On the other hand, European elections raising disintegration risk as the biggest tail risk (33%), closely followed by a trade war (20%) and a crash in global bond markets (18%).

"Investor positioning argues for a risk rally pause in March/April, with allocation to equities at a two-year high and bond allocation at a three-year low. Policy is the key catalyst for the Icarus trade to fly higher in the coming months," said Michael Hartnett, chief investment strategist."

As regards corporate profits, a net 57% respondents believe global profits will improve over the next 12 months, up from February (55%) and near a seven-year high.

"A net 32% of investors think the US dollar is overvalued, the highest proportion since June 2006. Expectations for faster global growth remain high at net 58%; expectations for Chinese growth jump to 11%, the highest level since 2013," survey findings suggest.