A record number of fund managers think the stock market is ‘overvalued’ right now and see a second wave of coronavirus cases as the biggest risk, according to a survey from Bank of America.
Around 78% of fund managers think valuations are too high, the highest percentage since Bank of America's high-profile survey began in 1998, and 49% believe a second wave of infections is the biggest risk to stock markets.
While the findings may not be surprising, certainly the market rally since the end of March has been, and despite the worsening economic picture the survey shows fund managers see growth expectations jumping, risk appetites surging and cash levels in their funds falling.
FRAGILE OPTIMISM
However, the survey also reveals fund managers think the current optimism in markets is fragile and only 18% think there will be a V-shaped economic recovery.
Most (64%) think the recovery will be either U-shaped or W-shaped, and while 37% now believe we’re in a bull market, 53% majority still think it’s a bear market rally, with the biggest tail risk remaining a second wave of coronavirus infections.
But the survey showed gross domestic product and company earnings per share expectations did jump as lockdowns ended, as fear of prolonged recession was whittled down to net 46% of respondents in June, compared to 93% in April.
Cash levels in the respondents’ funds dropped from 5.7% to 4.7% in June, the biggest drop since August 2009 when the market was recovering from the global financial crisis.
TECH STOCKS MOST IN DEMAND
However, the only long position fund managers seem to have conviction in appears to be US tech stocks, which have been deemed the ‘most crowded trade’ since 2013.
Around 72% saw US tech and growth stocks as the most in demand trade in June, followed by going long cash (9%), US Treasuries (6%) and gold (4%).
Post pandemic, fund managers see supply chain reshoring, a rise in protectionism and higher taxes as the biggest structural shifts, while 10-year annualised returns from stocks are forecast to be just 3.4% a year.
In terms of what fund managers in the survey want to see from companies, most want CEOs to improve balance sheets first (65%), raise capital expenditure second (23%), and buy back stock last (just 5%).
Technology, healthcare and communications remain the three sectors fund managers are allocating cash to the most, while the utilities, materials and energy sectors remain the areas fund managers are allocating to the least.
