Global investors, wary of a bond selloff and overvalued equities in the developed world, have increased cash holdings in portfolios and upped emerging market equity positions to their highest in three and a half years, a survey showed on Tuesday.
The latest monthly survey by Bank of America Merrill Lynch showed that fund managers reckon stocks are their most overvalued since 2000, and equities and bonds combined are near their most overvalued ever.
The poll of 208 fund managers managing $579 billion was carried out from Sept 2-8 against a backdrop of swirling expectations on when the Federal Reserve might raise U.S. interest rates.
Higher U.S. interest rates could spell trouble for bonds, equities and emerging markets. But fund managers remained drawn to emerging markets by the relatively high yields on offer, the same reason they increased their exposure to cash, BAML said.
U.S. 10-year yields this week hit their highest since June and 10-year German yields turned positive for the first time since then, too, stirring memories of last year’s “flash crash” when Bund yields rose 100 basis points in less than two months.
The BAML poll showed cash holdings rose to 5.5 percent in portfolios, though that is below July’s 15-year high of 5.8 percent. Asked about high cash weightings, 42 percent of those polled said they had “a bearish view on markets” and 20 percent attributed it to “preference for cash over low-yielding equivalents”.
The growing preference for cash came even as confidence in the world economy strengthened – 26 percent of poll participants expected improvement in the coming year, the highest level in nine months.
While 83 percent of funds expected the European and Japanese central banks to keep interest rates negative in the coming year, a net 61 percent also are bracing for higher global 10-year bond yields. That’s up from 47 percent in August.
“Risk assets are nonetheless vulnerable to a bond shock,” BAML said, adding that 82 percent of survey participants deemed bond prices “frothy”.
The net overweight on equities shrank to just 1 percent in September, compared with 9 percent in August. The underweight on bonds rose 2 percentage points to 45 percent, an eight-month high.
On a regional basis, Japanese equities were the most unloved, with the biggest underweight since 2012. But the largest swing was in U.S. equity allocations, which fell to a 7 percent underweight from last month’s 11 percent overweight.
Investors continued to pile into emerging market equities, where a net 24 percent said they were overweight versus 13 percent last month – the biggest in 3 1/2 years, the survey showed.
Emerging market stocks have outperformed their developed market peers this year, with MSCI’s index having gained over 12 percent.
However, the sector is among those relying on zero or negative interest rate policies (NIRP) in developed countries.
“The most vulnerable longs are all NIRP winners,” BAML said, citing also high-grade stocks, emerging debt, U.S. and European corporate bonds and real estate.