Fears of high valuations in the US market may be overdone as the latest Bank of America Merrill Lynch (BofA ML) Global Fund Manager Survey reveals that asset allocators had lifted exposure to the country in June.
Allocation to US equities increased by 16 per cent month-on-month moving to a net overweight position for the first time since March 2017, according to the survey.
The monthly survey, which polled 235 fund managers with assets under management of $684bn at the start of June, found that there had been a sharp reversal in sentiment to the US market.
While it is small overweight position (at around 1 per cent), it represents a big move by investors who had been 15 per cent underweight in May.
Net percentage of asset allocators who are overweight US equities
Source: BofA Merrill Lynch Global Fund Manager Survey
Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, said: “Investors have their eyes on the US this month with a record high favourable outlook for profits and a return to US equity allocation.”
Increased sentiment towards US equities has been driven by a more favourable outlook for US profits, which have reached a 17-year high, while outlooks for all other regions remain negative.
The move into US equities was also mirrored by significant drops in eurozone and global emerging markets holdings.
The 13 per cent fall in eurozone equity allocations was the largest monthly drop since July 2016 – the month following the Brexit referendum – and now represents a 20 per cent overweight among survey respondents. As such, eurozone equities are no longer the most favoured region.
Exposure to emerging markets fell again following a large drop in May, down by 5 per cent to a 22 per cent overweight position and down from a high of 43 per cent in April 2018.
As well as improved sentiment towards US equities, allocators have been increasing their UK equity holdings. The underweight position reduced by 3 per cent to 21 per cent off a low of 41 per cent in March this year. It remains the most unloved market, however.
Japanese equity allocations also climbed 5 per cent higher to a 17 per cent overweight.
While there has been a big change in attitudes towards US equities, fund managers have also begun to make predictions about how much longer the bull run has left to run.
Managers believe that the S&P 500 will peak at 3,040 on a weighted-average basis, a 9 per cent rise from current levels at around 2,780.
Where will the S&P 500 eventually peak in this bull run?
Source: BofA Merrill Lynch Global Fund Manager Survey
Broadly, allocators remain more favourable to stocks than bonds with equity allocations at a 33 per cent overweight, down 1 per cent on May. Bond exposure rose by 5 per cent in May to a 49 per cent underweight, the fifth consecutive monthly rise.
Cash holdings fell while exposure to real estate and commodities both rose in May.
Within equities, there have also been some changes on a sectoral basis as investors sold banks and industrials into more defensive areas.
Global bank weightings fell by 16 per cent in May to the biggest fall since the Brexit referendum to a 20 per cent overweight, although it remains a consensus sector long position.
Allocations to global technology remained stable at 23 per cent overweight and continues as the most popular sector.
Indeed, long FAANG/BAT – covering Facebook, Amazon, Apple, Netflix, Google owner Alphabet, Baidu, Alibaba and Tencent – has become the longest most-crowded trade since December 2015.
Managers also increased holdings in healthcare, consumer staples, materials, energy, and utilities stocks during May.
There remains some caution around markets, however. The biggest tail risk is a trade war, particularly after US president Donald Trump announced tariffs on aluminium and steel imports from Canada, EU and Mexico for ‘national security’ reasons.
There are other signs of caution such as a fall in expectations of an increase in operating margin over the next year, which have fallen by 2 per cent to an 18-month low
Allocators also remain concerned by levels of corporate indebtedness, with a record 42 per cent of managers claiming that companies are over-levered compared with a 32 per cent peak in 2008 at the height of the global financial crisis.
Additionally, forecasts for faster global growth remain static and “barely above the boom/bust threshold”, according to the bank.
How do you think the global economy will develop over the next 12 months?
Source: BofA Merrill Lynch Global Fund Manager Survey
Yet, expectations for a recession remain at least 18 months away with the weighted-average response suggesting some time during the first half of 2020.
In recent months the 10-year US Treasury yield – long seen as a market bellwether for rotation into bonds – has passed through the psychologically important 3.0 per cent level as the Federal Reserve has continued to tighten monetary policy.
It would take a rise in the 10-year US Treasury yield to 3.6 per cent – the new ‘magic number’ – for investors to begin rotating back into bonds, after reaching 3.5 per cent in April, the survey showed.
According to the survey results, 69 per cent believe domestic catalysts – such as lower inflation, higher unemployment or fears over the independence of the Fed – are needed for the central bank to stop tightening.
However, higher inflation remains a consensus view, with 78 per cent of survey respondents expecting a rise in the consumer prices index (CPI) rate over the next 12 months.