Economy

'Irrational exuberance' hits record high among fund managers despite lofty valuations

'Irrational exuberance' hits record high among fund managers despite lofty valuations”

Investors are riding a wave of "irrational exuberance" as they extend bullish positions even as they fret over valuations, according to the latest fund-manager survey by Bank of America Merrill Lynch.

Average cash balances slipped to 4.4 percent, the lowest reading since October 2013 and below 10-year average levels, while hedge funds' equity exposure was at 11-year highs.

Funds held a net 49 percent overweight, the highest level since April 2015, with USA allocations rising to a net 16 percent underweight versus 23 percent in October.

The "Goldilocks" scenario, a combination of low inflation and strong growth, has become the "consensus" view for the global economy, with 56% of investors predicting above-trend growth and below-trend inflation.

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

But despite cutting cash, a record-high 48 percent of survey participants considered equities to be overvalued - a sign of irrational exuberance, according to BAML.

"The all-time low for global cash balances was 3.4 percent in July 2007 and it has often troughed out below 4 percent, suggesting risk appetite has not maxed out", BAML said.

In particular, the impact of the Fed's $4.5trn balance sheet reduction and European Central Bank halving its monthly bond purchases from €60bn to €30bn-a-month divided investors with 42% expecting lower stock prices and 35% predicting stocks to go higher.

Meanwhile, pessimism towards the United Kingdom continued to rise, with a net 37% underweight marking a return to the lows last seen during the global financial crisis.

"Investors eye central banks, with 27% of those surveyed indicating the biggest tail risk to the markets is a policy mistake from the Fed/ECB; the top three are rounded out by a crash in global bond markets (22%) and a flash crash caused by "market structure" (13%)". At the same time the allocation to Japanese equities rose to the highest level for two years, with a net 23% of global managers overweight in the country.



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