Global bond and stock market valuations have reached their highest level since the early 2000s leading investors to adopt a bearish outlook amid potential frothiness in the world’s risk assets, according to a survey of fund managers.
Powered by record amounts of monetary stimulus from the world’s central banks, 54 per cent of investors surveyed by Bank of America Merrill Lynch said a combined measure of bonds and equities was now overvalued — an all-time record for the survey which has been running since the start of the century.
Fears of overvaluation drove some money managers to retreat to the safety of cash at the start of the month, with investors increasing their cash holdings to 5.5 per cent in September, up from 5.4 per cent in August.
More than 40 per cent of money market managers said they were prompted to shift into cash by a gloomier market outlook amid a world wide scramble for higher yielding assets.
Of the respondents, 20 per cent said they would rather hold cash than “low-yielding” equivalents such as government bonds, whose prices have been driven to record highs in recent months. Bond prices move inversely to yields.
With government bond yields hitting record lows following the UK’s Brexit vote in June, “investors see an unambiguous vulnerability to a ‘bond shock’ among risk assets” said Michael Hartnett, chief investment strategist at BofA.
The hunt for yield has accelerated as monetary policymakers in Japan and Europe have cut rates into negative territory — penalising commercial banks for holding excess cash reserves with the central bank.
But growing fears over the limits of central bank action prompted a three-day sell off in riskier assets from Thursday last week, with bond prices retreating and the US S&P 500 index suffering its worst one-day fall since the UK’s EU referendum in late June.
According to BofA’s survey, which was conducted between September 2-8 last week, when the ECB’s decision to hold off on further stimulus sparked a mini sell-off, 83 per cent of managers said they expected negative rates to remain in Japan and the eurozone over the next 12 months.
However, the prospect of central banks embarking on radical measures such as “helicopter money” — which would directly finance government and consumer spending — weakened in September, with 53 per cent of investors saying such policy tools would not be deployed over the next 12 months. This was up from 50 per cent recorded in August.
Despite the relative despondency about valuations in financial markets, more than a quarter of money managers expected higher global growth over the next year — a nine-month high for the survey.
“Macroeconomic optimism is firmly at pre-Brexit levels, with economic growth expectations at their strongest since June,” said Manish Kabra at BofA.
Political threats dominated investors’ list of potential “tail risks” with the prospect of disintegration in the EU cited as the biggest threat to the global economy.
A reversal in the EU project was cited by 23 per cent of fund managers, higher than the threat posed by a Donald Trump presidential victory at US elections in November, at 21 per cent.
Fears of a devaluation of the Chinese currency receded significantly in September to just 15 per cent as Beijing’s policymakers seem to have weathered the summer without a repeat of last year’s renminbi scare.
With Federal Reserve policymakers warning of still subdued inflation in the US, the threat from higher consumer prices — which could burn holders of US Treasury bonds — also fell to 15 per cent in September.
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