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BAML Survey Sees 'Irrational Exuberance'

A timely warning from the big end of the global investment markets, or more henny penny (‘the sky is falling') warnings?

According to the November investment managers report from global investment bank, Bank America Merrill Lynch (BAML) investors are riding a wave of “irrational exuberance” as they extend bullish positions even as they fret over valuations.

While a record net 48% of investors say stocks are overvalued, a net 16% say they are taking on above-normal levels of risk, another all-time high.

Investors are also taking out less downside protection and holding less cash, the survey shows with with cash holdings at four-year lows and risk-taking at all-time highs.

“Icarus is flying ever closer to the sun,” said Michael Hartnett, the bank’s chief investment strategist said colourfully in a commentary on the report. “And investors’ risk-taking has hit an all-time high.”

Even after an estimated $US5 trillion gain in US stocks over the past year (and huge gains in European share values and those in Japan), a net 49% said they are overweight, which is the highest level since April 2015.

The percentage of investors believing in a “Goldilocks” economic backdrop of steady expansion with tempered inflation rose to a record 56%.

Cash positions fell to 4.4% from 4.7% last month, the lowest level since October 2013 and below the 10-year average of 4.5%, according to the survey.

"A record-high percentage of investors say equities are overvalued yet cash levels are simultaneously falling, an indicator of irrational exuberance,” Hartnett concluded.

But its not all boom - Brexit still scares big global investors for example and a near-record 37% of investors are underweight position on UK equities for instance.

In fact the UK allocation by big investors is at the lowest since the global financial crisis.

But overall BAML analysts remarked that a record high proportion of funds said they were taking “above normal” risks.

“Measures of global risk appetite increased noticeably this month with cash allocations much lower, equity weightings up and increased exposure to risk,” BAML commented.

The survey notes a mini-rotation out of banks, though investors remain overweight the sector, in favour of unwanted energy companies and Japanese equities.

Surveyed investors are divided over the likely impact of the Trump tax policy next year, with one camp expecting it will yield no change to the economic outlook, and the other saying the reform will spur inflation. With funds held a net 49% overweight, US allocations improved to a net 16% underweight versus 23% in October.

Eurozone and emerging equity allocations were a net 47% and 43% overweight respectively while the Japan overweight almost doubled since October to 23%, which means investors have been buying into a soaring market.

The most crowded trade was US tech stocks listed on the Nasdaq index - in that position for the sixth time this year - along with junk debt and short-volatility positions, the BAML poll showed.

View More Articles By Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.



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