Concerns are building among global fund managers about the valuations of major tech stocks that underpinned so much of the recent growth in the S&P500.
The latest Bank of America-Merrill Lynch (BAML) Global Fund Manager Survey showed that investments in the FAANG+BAT stocks – an acronym of Facebook, Amazon, Apple, Netflix and Google, along with Chinese tech heavyweights Baidu, Alibaba and Tencent – were seen as the most crowded trade for the third straight month:
Reuters highlighted that in recent months, fund manager responses to the “most crowded trade” query have acted as a leading indicator for pending downturns.
Examples of the most crowded trade include Bitcoin in December (prior to a slump of more than 50%), and short-volatility trades in January which subsequently unwound in February’s market turmoil.
So far FAANG+BAT stocks are holding up, although the monthly allocation towards those companies in April fell to its lowest level since February 2013.
Fund managers highlighted regulatory oversight as the main risk facing the sector.
Almost two thirds of respondents said they would go underweight tech stocks if regulators dialed up the pressure around anti-trust laws and privacy standards:
Despite those concerns, the big-tech juggernaut may still have further to run if Netflix’s results overnight are anything to go by. The company’s share price rose by another 9% after it smashed analyst estimates for subscriber growth.
Looking at the broader S&P500, only 12% of fund managers surveyed expect earnings per share to rise over the next 12 months, just of third of the 35% in February.
However, the majority of respondents think the good times will continue to roll, at least for a little while.
Just 18% said equity returns have already peaked, while around 60% of those surveyed said the stock market won’t peak until at least the December quarter this year:
Elsewhere, the survey showed that the average allocation towards cash rose to 5% in April, above the long-term average of 4.5%.
And in light of the recent trade spat between the US and China, trade concerns were top-of-mind among fund managers in April.
Almost 40% of those surveyed said a trade war represented the biggest tail-risk to equity valuations, up from 30% in the previous month.
The BAML survey was conducted between 6-12 April. A total of 216 respondents who oversee combined assets under management of $US646 billion participated in the survey.
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