A vast majority of investors believe stock markets around the world are overvalued, as concerns over a new surge in coronavirus cases hang over the rapid recovery in prices since March.
Nearly 80 per cent of fund managers shepherding a combined $600bn of assets think that stocks are too expensive, the highest share in records going back to 1998, according to a monthly survey released by Bank of America on Tuesday.
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The biggest risk to equity prices is the chance of a new wave of Covid-19 infections, investors said. Just over half believe that stocks are poised to fall back into a bear market.
Hedge funds have pumped up their exposure to equities to the highest point since September 2018, the survey showed. But more broadly, market optimism was "fragile" and "neurotic", the bank said, with no signs of excess bullishness despite an almost 40 per cent recovery in US stocks since the depths of the pandemic crisis.
Global indices have staged a rapid recovery from their more than 30 per cent drop in March, fuelled by emergency interventions by central banks and governments. The US benchmark S&P 500 index is trading about 10 per cent below record levels hit earlier this year before concerns over the pandemic ripped through markets, while European stocks are still 15 per cent off their highs.
A brief spell of market volatility last week that analysts put down to concerns over new infections in the US and China was calmed by an announcement from the Federal Reserve on Tuesday. The central bank said it would begin purchasing a "broad and diversified portfolio" of individual company bonds under a plan it outlined in March.
The survey showed that fund managers were more optimistic than they were a month ago. More than a third of investors believe stocks are in a bull market, up from a quarter in the previous survey. Similarly, nearly a fifth are expecting a V-shaped economic recovery: still a minority, but up from just 10 per cent a month ago.
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Cash levels in portfolios have fallen sharply during the market rally, from 5.7 per cent in May to 4.7 per cent in June. That marked the biggest monthly drop since the 2008-09 financial crisis, as investors move into higher-risk asset classes.
Hopes for a rebound in global growth have not been matched by expectations of a quick recovery in corporate profits, however. The S&P 500 now trades at about 22 times its constituents' predicted earnings, well ahead of its five-year average of 17 times.
Investors are now overweight stocks for the first time since February, with long positions concentrated in the US stock markets that have led the global recovery. Still, over the past month investors have slightly decreased their net exposure to some of the best-performing sectors during the pandemic: technology, communications and pharmaceuticals.
- Financial Times