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Bubble fears as fund managers chase markets higher

Survey finds managers are taking on record levels of risk even though they believe stock markets are overvalued.

 
Bubble fears as fund managers chase markets higher
 

Fund managers are taking on record levels of risk despite believing stock markets are overvalued, according to a regular survey of investors by Bank of America Merrill Lynch.

A net 16% of managers said they were taking above-normal levels of risk in their portfolios, a record high since Bank of America Merrill Lynch first began surveying manager risk-taking in 2001.

Yet a net 48% believe shares are overvalued, a record high since the survey first began asking the question in 1998, eclipsing even the levels seen at the height of the dotcom boom at the turn of the century.

Levels of cash held in portfolios meanwhile fell to 4.4%, down from 4.7% last month and below the 10-year average of 4.5%.

'Icarus is flying ever closer to the sun, and investors' risk-taking has hit an all-time high' said Michael Harnett, chief investment strategist at Bank of America Merrill Lynch.

'A record high percentage of investors say equities are overvalued yet cash levels are simultaneously falling, an indicator of irrational exuberance.'

For the sixth time in seven months, Nasdaq stocks were the most crowded trade, as managers backed a continued rally in the US tech-heavy index, homes to the likes of Facebook, Amazon, Apple, Netflix and Google owner Alphabet.

Eurozone and emerging market equities also remain favourites, with a net 47% and 43% of managers respectively saying they were overweight the regions.

But amid all the bullishness, one market remains shunned by investors: the UK.

A net 37% of fund managers are underweight the UK stock market, their most bearish positioning since the financial crisis. 

'UK sentiment is severely depressed and remains the least popular country market for European investors,' said Ronan Carr, Bank of America Merrill Lynch European equity strategist.

25 comments so far. Why not have your say?

martin b.

Nov 14, 2017 at 16:55

If 'UK sentiment is severely depressed and remains the least popular country market for European investors,', then why is the FTSE so high?

As a relatively novice investor I would have thought if people are moving away from UK stocks then the FTSE would fall. I realise that a lot of the FTSE100 companies have operations outside the UK but the FTSE 250 is also doing well. I'd be interested to understand why that should be.

Martin

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Anonymous 1 needed this 'off the record'

Nov 14, 2017 at 17:21

Last week the uk stocks were undervalued this week there overvalued..

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Anonymous 1 needed this 'off the record'

Nov 14, 2017 at 17:22

Last week the uk stocks were undervalued this week there overvalued..

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geoffrey mulford

Nov 14, 2017 at 17:48

There simply no where else you can put your money other than the stock market if you want a yield that beats inflation. I could buy another house and rent it out but I find it hard enough looking after one house and if the person who rents the house stops paying I would have all the headache of kicking them out.

I think yield everywhere will just go down and down. It will be more of a case of parking your money rather than investing it.

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Tyrion Lannister

Nov 14, 2017 at 18:53

Geoffrey m., you've hit the nail on the head, there's nowhere else to put your money. Having said that, FTSE stocks are relatively good value (martin b. note the word relatively) but their apparent high price is due as much to the weak pound as anything.

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martin b.

Nov 14, 2017 at 19:50

Thank you Geoffrey & Tyrion, that makes sense - I am probably not alone at this time in taking an interest in investment trusts who invest much of their money abroad, eg SMT, 3IN, WTAN, WPCT, RCP, FRCL, MNKS, MYI and WWH. But all of these are in the FTSE, so I guess even though I might buy into these to shift my investments away from the UK - I am still helping to boost the FTSE?

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anglo29

Nov 14, 2017 at 21:10

No-one's mentioned UK Smaller Companies, yet they appear to be having quite a reasonable run judging by my portfolio. Can it be despite the current idiot bunch occupying Westminster, they are simply getting on with the job of trading successfully in the domestic market?

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Pensioner

Nov 14, 2017 at 22:14

Martin b. In these uncertain times. If you invest in SMT,WTAN, FRCL and MNKS you should be ok. But, we have had a long Bull run since the banking crash and could be due for a Bear market. So you will be entering at a high price. Ok, and no matter if u invest for 5 years plus. Avoid WPCT, has not made its launch price of £1. When it does then consider investing. Not knowing your age and circumstances, consider OEICS, a cheaper version to unit trusts. Other than your stockbroker charge as little as 0.45% of your holding. A charge of £11.95 for a share or Inv. Trust and 0.5% stamp duty will be payable. Look at Fundsmith, Lindsell Train and for trackers, another low cost entry to to the market with Vanguard either direct or through a broker. When you have built serious capital then do Investment trusts, otherwise stick with OEIC's the cheaper option. I confess to an interest in all my suggestions. It's up to you, but good luck. Tip: My latest venture in OEIC's is "Blue Whale Growth Fund Class I" (A global fund). Launched in September this year which I will monitor closely!

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Tyrion Lannister

Nov 14, 2017 at 22:44

To add to pensioners post, it really does depend on the amount you’re investing whether ITs or open ended funds are cheaper.

For example, once you hold £10,000 in an HL ISA, the platform charge for additional IT/Equity investment is zero. Also the £11.95 trading fee is fixed, so the larger the investment, the less relevant the charge is. You do need to watch out for the spread with ITs as this can be significant so don’t buy unless you intend to hold onto it.

My fund portfolio is roughly 50% ITs.

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martin b.

Nov 14, 2017 at 23:10

Thank you all. I agree in caution at this time, however I started being cautious and holding on to more cash about 2 years ago when the FTSE broke thru' 6000! Since then its kept its upward trajectory in spite of Brexit, but now is not the time to change strategy and if I do buy, then as Pensioner advises it is generally in less volatile stock (except I do also like SMT which is hard to resist given the stocks that it holds and its recent track record)..

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Maverick

Nov 15, 2017 at 00:06

Er . . . if 48% of managers think shares are overvalued, doesn't that imply that 52% think otherwise?

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Riggerspanner

Nov 15, 2017 at 10:21

There could be a substantial % of "don't knows" :-)

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geoffrey mulford

Nov 15, 2017 at 12:47

warren buffett said these stock market price make no sense with interest rates at 5% but make perfect sense when interest rates are so low,

Martin Armstrong thinks dow jones could go to 4200 just because there is no where else to put your money.

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Maverick

Nov 16, 2017 at 10:44

Riggerspanner - I'd like to know who these "don't know" managers are, then. It's their job to have an opinion as to whether the markets are overvalued or undervalued.

Perhaps that's why I run my own SIPP and ISA.

In any case, I've always taken the view that if a share is rising the market probably thinks it has further to go, irrespective of whether it's 'overvalued' or not. But what you can't do nowadays is to buy a good share and sit on it for five years. You have to keep monitoring it.

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andy

Nov 18, 2017 at 12:33

Maverik

You will get people (like the folks at Ruffer) who's answer is normally something like "I don't know and I don't care" - and simply get on with trying to put together a portfolio for "all seasons".

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Maverick

Nov 18, 2017 at 14:11

Andy -

Which is no doubt why Ruffer funds don't perform in "most seasons".

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Riggerspanner

Nov 18, 2017 at 15:00

I think that in the short term, movement up or down will be determined by sentiment and herd psychology rather than value, so it's not possible to predict whether markets will be higher or lower in 6 months time. I agree with Maverick "that if a share is rising the market probably thinks it has further to go, irrespective of whether it's 'overvalued' or not."

Over the longer term I'm sure markets will trend inevitably towards perceived value but those perceptions can change v quickly. If we are truly entering a 4th industrial revolution based upon AI, machine learning, robotics, nanotech, quantum computing, autonomous vehicles etc then current FAANG valuations will come to be justified. My guess is there will be hiccups both political and technical (can you imagine a mix of driverless and human-driven vehicles on the road is going to turn out well?!) which delay implementation and prompt corrections to profit forecasts and therefore corrections to share prices!

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Chris Squire

Nov 19, 2017 at 17:42

Nov 15, 2017 at 00:06 Maverick: the report said: ‘‘Yet a net 48% believe shares are overvalued” - the key word is ’net’ = ‘overvalued %’- ‘undervalued %’, eliminating the ‘don’t knows’.

If there are no 'don't knows', the split must be 'over 48% vs. 'under' 26 % - which sounds right to me.

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Chris Squire

Nov 19, 2017 at 17:43

My apologies; I meant:

If there are no 'don't knows', the split must be 'over' 74% vs. 'under' 26 % - which sounds right to me.

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Maverick

Nov 19, 2017 at 22:46

Chris - In other words, you are saying that only a statistician would actually understand what Daniel Grote was saying.

Wouldn't that mean that a net 2% of UK citizens voted for Brexit?

Sounds like W1Aspeak (or Mugabespeak?) to me.

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Chris Squire

Nov 20, 2017 at 11:56

Maverick: I’m surprised you haven’t encountered this before.

The net score is not used for a choice between individual or courses of action. Instead we use ‘majority’ or ‘lead’ - so the Leave (Leave’ - ‘Remain’) lead was 4 % and would be wiped out by a 2 % movement from ‘Leave’ to ‘Remain’.

The net score (‘Over’ - ‘Under’) is widely used by pollsters (who are not statisticians) to report polls of preferences and sentiment, where there is often a substantial ‘Don’t know’ or ‘Don’t care’ score.

Here’s an example from the General Election: https://onefourzerogroup.com/can-sentiment-analysis-help-predict-2017-general-election/

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Maverick

Nov 20, 2017 at 16:32

Chris - I'm not altogether surprised I haven't encountered this before.

Having been a pensions solicitor for 25 years, I'm well aware of the confusion that can be caused by the use of jargon or 'terms of art' which are bandied around by specialists, who appear to believe that Joe Public will understand them. This 'net percentage' is just statisticians' jargon, and this particular Joe Public has never had it explained to him. I don't suppose for a second I'm alone.

'There are lies, damned lies and . . . . '!

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geoffrey mulford

Nov 20, 2017 at 17:51

Hillery Clinton?

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Chris Squire

Nov 20, 2017 at 18:03

Opinion pollsters are not statisticians - polling is an empirical discipline based on popular psychology and practical experience. The best of them apply some of the lessons from a Statistics 101 course such as the importance and difficulty of getting an unbiased sample, but that's as far as they go.

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Maverick

Nov 22, 2017 at 10:57

Chris -

Yeah well, 'empirical' and 'a Statistics 101 course' are exactly that sort of jargon.

In the pensions world, people throw about terms like 'governance' and 'stochastic' without ever bothering to define them.

Opinion pollsters have not exactly covered themselves in glory over the last few years.

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