Investor equity valuation worries grow – BAML survey

By Julien Ponthus and Helen Reid

LONDON (Reuters) – Two-thirds of investors believe U.S. tax cuts will boost equity markets, which are already increasingly seen as over-valued, a monthly survey by Bank of America Merrill Lynch (NYSE:) showed on Tuesday.

Expectations that lawmakers will approve the tax reform, which would slash the U.S. corporate tax rate to 21 percent, pushed Wall Street to record closing highs on Monday, with investors betting on a boost to profits, share buybacks and dividend payouts.

The reform will result in higher bond yields and higher stocks next year, said respondents to the survey conducted last week. Some 172 fund managers with $480 billion under management took part.

Optimism about the tax overhaul came as the proportion of respondents feeling equity markets are over-valued hit 45 percent, the highest level since the survey began in 1998.

Enthusiasm about the tax reform was lost on the tech sector, however, where allocations dropped to their lowest since June 2014 as flows shifted from highly-valued tech stocks into banks and other cyclical sectors.

Investors were also increasingly positioning themselves against a dip in markets. Cash balances rose for the first time in four months and the net share of investors taking out protection against a correction increased.

Paradoxically, BAML strategists said this increased caution would likely pave the way for stocks to gain further ground.

A vast majority of investors expected equity markets to peak in 2018: 25 percent believed it would be in the first quarter of 2018, 30 percent in the second and 28 percent in the last six months of 2018.

A “policy mistake” from the European Central Bank or the Federal Reserve in their bid to normalize monetary policy after years of aggressive stimulus was seen as the most important risk by 23 percent of respondents, ahead of a global crash in bonds and a debt crisis in China.

Some 83 percent of respondents also believed the bond market is over-valued — down from a record-high 85 percent in October.

Being long was seen as the “most crowded” trade for the second time, followed by buying U.S. and Asian tech giants (the FAANGs and BATs), and being short volatility.

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