Managers showing ‘irrational exuberance’ as cash balances drop

Despite perceiving equities to be overvalued, global fund managers cut cash allocations and admitted taking above normal levels of risk, according to the November BofA Merrill Lynch fund manager survey.

Having been 4.7% in October, the average cash balance held by global managers fell to 4.4% in November which according to BofA ML is the lowest level since October 2013 and is below the 10-year average of 4.5%.

At the same time, a record net 16% of investors said they are taking above-normal levels of risk in their investment, despite the fact that a record high net 48% of investors surveyed thought that equities were currently overvalued.

“Icarus is flying even closer to the sun,” said Michael Hartnett, chief investment strategist, “and investors’ risk-taking has hit an all-time high.”

He added: “A record high percentage of investors say equities are overvalued yet cash levels are simultaneously falling, an indicator of irrational exuberance.”

In terms of positioning, managers’ allocation to global equites hit its highest level since April 2015, with a net 49% overweight in the region.

UK weightings fall

Meanwhile, pessimism towards the UK continued to rise, with a net 37% underweight marking a return to the lows last seen during the global financial crisis. At the same time the allocation to Japanese equities rose to the highest level for two years, with a net 23% of global managers overweight in the country.

“UK sentiment is severely depressed and it remains the least popular country for European investors,” said Ronan Carr, European equity strategist.

November also saw a slight pick-up in the US, with the degree of global managers underweight falling from a net 21% in October to a net 16% in November.

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