According to fund managers, the world is awesome.
In particular, stocks.
That’s the prevailing view in the latest Bank of America Merrill Lynch (BAML) Global Fund Manager survey with respondents long, unprotected and expecting the bull market of the past decade to last for at least another year.
Essentially, sentiment is approaching euphoric levels.
Here’s just a few charts from the latest survey that underline that point.
The first shows the net exposure of hedge fund managers to stocks going back to before the GFC.
In January, the proportion jumped 9 percentage points to 49%, the highest level since 2006.
BAML said total respondents are now the most overweight stocks relative to bonds since August 2014. It also said that at 55%, the proportion of respondents currently overweight stocks was 1.1 standard deviations above the long-term average.
Unusually high, in other words.
And that’s partially because they now think the bull market in stocks will no longer end in 2018 but a year later.
Reflecting improvements in the global economy, positioning changes towards cyclicals away from defensive sectors were also extreme in the latest survey.
The move into tech was the largest since July 2014, a result in stark contrast to telecoms which were dumped at the fastest rate 2005.
In contrast to stocks, the allocation to cash fell to 4.4%, the equal lowest level since 2013.
Given current sentiment levels and positioning, respondents in the latest survey nominated an “inflation and bond crash” as the biggest risk facing markets right now.
Stocks and sharp increases in bond yields do mix well in most instances.
While BAML is not expecting that to eventuate, it says that investor positioning and peak optimism towards corporate profits and policy will likely act to lift volatility by the end of the current quarter.
However, for anything more sinister than that, BAML says it will likely require a spike in both bond yields and inflation.
The latest survey took the views of 213 respondents with a combined $US591 billion under management.