Fund managers think stocks and bonds are getting expensive

Based on recent movements in risk assets, things are seemingly looking up for the globe at present. 

Stocks are rallying, commodities such as crude oil and iron ore are on a tear, while high-yielding currencies such as the Australian and New Zealand dollars — often cited as barometers of investor sentiment — are also pushing higher.

On face value it appears that confidence is back, although questions remain as to whether the recent recovery in risk assets is the start of longer-lasting move or just the latest false dawn that will almost inevitably lead to a reversal in the period ahead. 

According to the latest fund manager survey released by Bank of America-Merrill Lynch (BAML) on Tuesday, big money investors remain cautious towards the sustainability of the recovery in financial markets, upping their allocations to cash and reducing exposure to many riskier asset classes over recent weeks.

The survey offers a glimpse into the mindset of fund managers over any given month, capturing responses from 200 individual panelists who manage close to $600 billion between them. 

A small but influential group of investors, in other words.

The caution expressed in the April survey is no better demonstrated than in the chart below, supplied by BAML. It shows the change in investor positioning by individual asset class over the past month. Despite the risk asset rally, fund managers flocked to the relative safety of consumer staples and cash in April, reducing their exposure to riskier assets over the same time period.

It was clearly not a good month for Japanese stocks, with investors becoming net underweight for the first time since December 2012, according to BAML.

Mirroring the caution expressed in the chart above, allocations to cash rose to 5.4% of funds under management from 5.1% in March, leaving it at levels that are normally associated with periods of past risk aversion.

Partially explaining the movement towards cash and less-risky asset classes, the net percentage of respondents indicating that both stocks and bonds are overvalued spiked in April, rising to the seventh highest level in the 13-year history of the survey.

According to BAML, the shift towards cash suggests that range trading in risk assets looks set to continue with valuation constraints limiting the potential for further gains.

Here are just some of the other findings to come from BAML’s April survey.

• 20% of respondents deem long US dollar positioning to be the most crowded trade at present, shading short emerging markets (19%) and long high quality stocks (17%) for that mantle.
• 82% believe that a global recession in the next 12 months is unlikely.
• Inflation expectations continue to improve, rising to the highest level seen in nine months.
• 54% believe the US Federal Reserve will lift rates twice in 2016, up from 41% in March. 27% believe that there will be only one 25 basis point hike while 9% believe the Fed will increase rates three times before the year is out.
• 21% see the largest “tail risk” for markets as a quantitative failure, the largest proportion of any risk nominated. That’s followed by Brexit (19%) and a US recession, China yuan devaluation or emerging market default at 11% apiece.

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