However, "be fearful when others are greedy and greedy when others are fearful" is one of the most commonly used investment phrases and one that has been proved correct on many occasions.
This raises the question of whether investors should be taking a more bearish, contrarian view.
It is interesting to note that it took a strong market to cause the confidence index to increase markedly.
The research shows that 82 per cent of Hargreaves’ clients believe that the UK market will be higher in 12 months’ time, even though the FTSE All Share has rallied more than 20 per cent over the past year and more than doubled over five.
Performance of indices over 5yrs
Source: FE Analytics
Back in 2009, when valuations were at record lows and the FTSE had plummeted some 30 per cent, confidence was at a very low level, when with the benefit of hindsight it is clear the market was at a very attractive entry point.
No matter what the experts tell us, the vast majority of investors are more confident at the top of the market when all the data and macro noise is positive, rather than at the bottom when sentiment is at its very lowest.
So what about now? Is all the confidence sweeping through the industry justified, or is this another case of misplaced, hopeful optimism?
FE Trustnet readers are undecided, with just over half believing that the market will suffer a significant market correction in the next 12 months, while the remaining 48 per cent are presumably more optimistic.
With this in mind, we thought it would be a good time to ask the industry experts what they think. Gervais Williams, manager of the highly rated CF Miton UK Multi Cap Income fund, says a big pull-back is looking likely, prompting him to take out a put option – a form of insurance – against the FTSE 100.
"Is it time to be worried? Yes, I think it might be," he said. "This is why we’re using a put option on the market. There is clearly a danger of a correction when the market has had a good run. There is always more downside."
"We’ve had five great years, which has made a lot of people feel more comfortable. Well we’re not."
Williams believes there are major macro risks on the horizon that optimistic investors seem to have ignored. These, he say, could provide a catalyst for a correction.
"I think we’re swimming in shark-infested waters," he said. "Issues like the US debt ceiling could cause things to fall apart. Then you’ve got the eurozone crisis – in truth, I think there is a big chance that the politicians could misjudge things."
While the US and Europe are serious threats, Williams (pictured) believes that China is the biggest of all.
"There’s high trading in China at the moment, but because of the huge amount of investment and infrastructure spend, there’s the risk that it won’t be able to borrow at the same rates," he said. "If this happens, then you have the scenario where China could run out of cash." "There could also be big pressures on the currency as we saw in India recently, and then we could be talking about recession. There’s not a high chance of this happening, but with valuations where they are, it’s yet another thing to consider."
"Valuations aren’t outrageous, but they’re based on profit margins at record highs."
The put option has a 1.6 per cent weighting in the CF Miton Multi Cap Income fund, which Williams says would protect around a third of the portfolio in the event of a correction.
"If this were to happen, the put option could make up more like 10 per cent of the fund. At that stage I could cash it in and use that money to buy companies at lower levels," he added.
Hugh Yarrow, manager of the five crown-rated Evenlode Income fund, agrees that investors have become complacent. He does not think markets are as overvalued as Williams suggests, but does believe the wave of optimism is misplaced.
"You’ve got a lot of people saying that we’re at the beginning of a bull market, but I don’t really understand that – we’ve been in one for the last five years," said Yarrow (pictured). "It shouldn’t be forgotten that valuations have gone up. We’ve had a big re-rating since the despair of March 2009. I’d say that today, valuations are fair to slightly expensive, but we’re still confident that we can make money for our clients over a five-year view."
Yarrow lists China and Europe as the two major problem areas and says he would not be surprised if there was a macroeconomic setback next year, which could result in a significant pull-back.
Simon Murphy, who heads up the £288m Old Mutual UK Equity fund, is a little more optimistic.
While he thinks the market is due to pause for breath, he sees nothing on the horizon which would result in a correction of more than 20 per cent.
"It all depends on what you define as a significant correction – if you’re talking about a 5 to 10 per cent correction, I think there’s a strong chance of that happening," he explained.
"We haven’t had one for a while and we have had a good run. Even during bull markets you get corrections like these."
"I agree with the point that there is some complacency, but I think 20 to 30 per cent is unlikely, unless we saw a major black swan event in a country like Iran. The market has risen a lot over five years, but it has climbed the wall of worry over this period. Not a lot of investors have enjoyed it and many have watched from the sidelines."
Murphy thinks more money could trickle in to the markets, which will help support valuations. The manager is relatively sanguine about the major macro risks facing markets and believes another re-rating could occur as a result.
"The big events just haven’t happened and I think the risks of them happening are receding," he said.
"The periphery in Europe has made big adjustments and the banks are repairing their balance sheets – albeit slowly."
"The worst of the US gridlock looks like it’s over and I think the hard-landing scenario in China is disappearing."
"I think we’re entering a mid-cycle phase. We’re seeing better growth, austerity is easing and corporate confidence is high. We need to see that translated into spending, but I think there’s every chance that the market could go from being on 12.5-times earnings to 13 or 14 times."
His views are echoed by Paul O’Connor, director of multi-asset at Henderson.
"We have progressively dialled down the risk on our funds in recent weeks on the view that the recent rally has exhausted the value in most assets and we don’t see many catalysts for a further re-rating," he said.
"The post-September rally has celebrated strong data in the eurozone/China and an increasingly dovish view on the Fed. We would be wary of extrapolating either of these themes and see the risk of a pull-back in the near-term."
"We think this is a time for patience and we await the better buying opportunities that we expect to emerge in the months ahead. However, while we see the risk of a pull-back in markets over the next few months, we are not expecting a major correction."
FE Alpha Manager James Thomson (pictured), manager of the Rathbone Global Opps fund, argues that there is no direct relationship between valuations and market corrections, and doesn’t see major macro risks on the horizon. As a result, he thinks a re-rating is very possible.
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"It’s true that valuations have risen, but I don’t believe a major correction of more than 15 per cent is on the cards," he said. "Having looked at previous corrections, toppy valuations have never provided a meaningful catalyst. The catalyst has always been Fed tightening, higher inflation or some kind of energy crisis. So long as growth continues to outpace inflation, valuations could still, quite feasibly, creep higher."
In the optimistic camp is strategist Max King, who works at Investec. In spite of the Hargreaves Lansdown survey, in general King does not think investors are optimistic, and as a result thinks talk of a market correction is unjust.
"So long as so many investors anticipate a significant correction around the corner or within the next 12 months, it won't happen," he said. "Investors continue to be fearful and I don't see that changing."
"Many investors now regret not investing more heavily into equities when they had a chance and are hoping for a setback to provide an opportunity to buy in. Looking for a setback is wishful thinking for these underweight investors."
"A significant setback is likely when fear turns to greed and the bearish strategists and commentators get fired. That is unlikely in 2014 without a major advance of over 20 per cent."
Experts seem to be in agreement that markets are far from cheap at the moment and could be due a pull-back. However, there is no clear catalyst on the horizon that would prompt a major market correction on the scale of 2008 or 2011.
Are you worried about a market correction? If so, which funds are you using to protect yourself against one? Let us know in the comments section below, and we’ll get your choices analysed by a selection of industry professionals.
