The proportion of fund managers who believe equities are overvalued has hit its highest level on record, according to Bank of America Merrill Lynch.
The bank’s latest global fund manager survey), gauging sentiment at the beginning of March, found a net 34 per cent of managers believed equities to be overvalued, the highest level in the survey’s 17-year history.
One region in particular is causing concern. US equities have been on a steady rise for several months, indices new highs on a continuous basis in the aftermath of president Donald Trump’s inauguration.
The forward price-earnings ratio for the S&P 500 reached 17.6 per cent last month, according to FactSet, the highest level since 2004.
Equity markets seem to have priced in potential tax reform from new Mr Trump, including a general cut in corporation tax and aid for exporters.
Despite this, some 40 per cent of managers said they did not expect policy to feed through before 2018.
Only an insignificant proportion expected no policy change at all, but worries over US stocks led 81 per cent to identify the US as the most overvalued US equity region. As a result, a shift away from the market was the most common trade this month, with allocations to US securities reducing by 12 percentage points between the February and March surveys.
Bearish US investors instead shifted capital to emerging markets, which saw a 13 percentage point rise in allocations with a net 44 per cent describing the area as undervalued.
This in part could be led by rising manager expectations for a stronger Chinese economy. The net proportion of managers agreeing with this stance turned positive for the first time since 2014. A net 11 per cent suggested the world's second largest economy will grow over the coming months.
While managers wait in anticipation of a range of tax cuts from Mr Trump, his rhetoric on trade seems to be losing its impact on survey participants. For some months investors have feared protectionist policies, suggesting it to be the likeliest catalyst to bring an end to rising markets.
But the proportion of managers concerned about protectionist policy fell to just 20 per cent in March, from 34 per cent in February.