Every month the Bank of America Merrill Lynch conducts a market valuations level survey comprising over 200 institutional investors with $600 billion of assets under management. Since early 2016 the net percentage of responders saying that equity markets are overvalued has risen from 0% (i.e. 50/50) to an overwhelming 44%; this is a record level, just exceeding the survey’s previous peak at the end of the dot-com bubble. Almost 40% of those polled cited ‘Long Nasdaq’ as being the most crowded trade with ‘Long Eurozone Equities’ a distant second at 20%.
Appropriately the survey was conducted over the first week of June and concluded the day before the June 9th technology stock retreat where the Nasdaq shed almost 2%. Since then the index fell further yesterday and today seems to have steadied - returning to Friday close levels. But last Friday’s blip would be barely noticed - in terms of returns - for those who have doubled their money in the index over the last 4 years. However, given the abnormally low volatility of late it seems more fast money has flowed into stocks, particularly in the US, and particularly in the tech sector. Moreover it seems, many institutional investors feel this is the case which could potentially heighten their sensitivity to surprises in the sector. With equity indices such as the S&P500 and Nasdaq trading at/near all-time highs, and with price-earnings ratios precarious high at ~22 and ~33 respectively, it’s not hard to imagine a relatively minor shock being enough to upset the balance.
Of course there is vast growth potential in the tech sector as the ‘fourth industrial revolution’ unfolds. But when this is already substantially priced in it makes it all the more likely to be a bumpy ride. As value investors in bonds it was interesting to note that the BofAML survey had only 5% citing ‘Long EM FX and Debt’ as the most crowded trade. To us it seems a weakness in the survey that High Yield Bonds were not a segregated option as we see these as a distinctively overvalued assets class; whereas value can still be found in high grade debt across developed and emerging markets. In the current uncertain environment with what seems to be much complacency and overreaching for returns we see this as the most sensible and attractive option.