The Economy

Bonds Overvalued, Equity Bubbles Biggest Tail Risk

A growing number of fund managers think global equities and bonds are close to bubble territory, according to BofA Merrill Lynch.
Katie Kuehner-HebertApril 14, 2015
Bonds Overvalued, Equity Bubbles Biggest Tail Risk

Investors are increasingly worried that overvaluations in both bonds and equities could lead to possible bubbles, according to the BofA Merrill Lynch Fund Manager Survey for April.

A net 25% of the global survey’s 145 respondents said that global equities are currently overvalued, up from a net 23% in March and a net 8% in February. Still, it hasn’t reached the level of concern expressed in 1999, before the dot.com bubble burst.  At that time, a net 42% of investors surveyed were concerned about overvaluations.

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bubbleHowever, the level of concern for overvaluations within the bond markets reached a new high in the global survey’s history, with a net 84% of respondents saying that bonds are overvalued, up from a net 75% in March. At the same time, a net 13% believe that “equity bubbles” are the biggest tail risk markets face, up from 2% in February.

More than two-thirds (a net 68%) of the global respondents said that the United States is the most overvalued region, while all other regions, including Europe and Japan, remain undervalued. Most (85%) of the survey respondents expect the Federal Reserve to raise rates this year, at a time when the European Central Bank and the Bank of Japan are engaged in monetary stimulus.

“April’s survey offers further proof that global investors are front-running global monetary policy,” chief investment strategist Michael Hartnett said in a press release. Manish Kabra, European equity and quantitative strategist, added that the firm is “seeing a form of rational exuberance in Europe where a positive view on stocks is supported by fundamentals — but investors no longer believe valuations are cheap.”

As the Fed’s Open Market Committee starts to tighten monetary policy, 18% of the respondents said that currencies are most vulnerable to volatility, up 5 percentage points from March. A net 13% said the U.S. dollar is overvalued, “a big swing” compared with February, when a net 12% said it was undervalued.

A total of 145 asset managers, managing $392 billion, participated in the global survey.

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