Markets overvalued; 2nd wave of Covid-19 biggest tail risk: BofA Securities

After a sharp recovery in global equity markets from their March 2020 lows, investor sentiment remains cautious with most global fund managers surveyed by BofA Securities in July saying the stock market remains overvalued. According to BofA Securities, 210 participants with $607 billion worth of assets under management (AUM) participated in the survey between July 2 and July 9.

Of those surveyed, 71 per cent believe the stock market is 'overvalued' and 74 per cent suggesting ‘long US tech stocks’ to be the most crowded trade. That said, 52 per cent of the fund managers surveyed by BofA Securities believe the second wave of Covid-19 pandemic is the biggest ‘tail risk’ to equities, followed by US election, credit event, and populist policies to end inequality.

“Cash levels rose to 4.9 per cent from 4.7 per cent; Wall Street’s $24 trillion rally yet to elicit 'greed'; BofA Bull & Bear Indicator is at 2.9 - far away from worryingly bullish levels (above 8.0),” the BofA Securities survey findings released July 14 said.

Cash levels at institutional funds (pension funds / insurance companies) have risen from 3.3 per cent to 4 per cent in July. On the other hand, cash levels at retail funds (mutual funds / unit trusts / investment trusts) have dropped from 5.2 per cent to 4.8 per cent in July, the survey findings suggest.

Among regions, European Union (EU) is more attractive to investors on fiscal policy with net 21 per cent of FMS investors preferring to remain overweight on the region in the next 12 months, up from the 14 per cent in June. Among asset classes, commodities has seen the highest allocation since July 2011, with a net 12 per cent of FMS investors saying they are overweight this asset class, BofA Securities said. Allocation to equities remains low, while allocation to bonds is high relative to past 10 years, the report says.

Global growth

As regards growth, respondents raised global growth expectations by another 11 percentage point (ppt) to net 72 per cent. This is the highest level since January 2014. Around 36 per cent respondents expect the global economy to get "a lot stronger – the highest figure ever recorded going back to October 1994.

“24 per cent of investors think the economy is early-cycle, up from 16 per cent last month while 62 per cent of investors think the economy is in a recession, down from 72 per cent last month,” BofA Securities said.

However, inflation expectations increased by 16ppt, with net 37 per cent of FMS investors expecting higher global CPI in the next 12 months, but only 5 per cent say inflation will be ‘a lot higher’.

Biggest 'tail risk'	%
Covid-19 second wave	52
US election	15
Credit Event	11
Populist policies to end inequality	8
Source: BofA report