BAML Survey: Equity Valuations Concern Investors

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A monthly survey by Bank of America Merrill Lynch revealed that two-thirds of investors trust U.S. tax cuts will enhance equity markets, which are already viewed as over-valued at this time. On Monday, Wall Street closed at record highs, driven by the expectation that lawmakers will approve the tax reform that cuts the U.S. corporate tax rate to 21 percent as investors bet on a boost to profits, share buybacks and dividend payouts.

The tax overhaul will result in higher bond yields as well as higher stocks next year, said participants of last week’s survey that was made up of over 170 fund managers with $480 billion under management. Optimism regarding the tax overhaul was indicated by the number of participants believing that the equity markets are over-valued hit 45 percent, the highest level since 1998 when the survey was first introduced.

The tech sector was unenthusiastic about the reform as positions in the sector fell to their lowest since June 2014 as interest among investors moved away from highly-valued tech stocks towards banks and other cyclical sectors.

Investors also progressively positioned themselves against a dip in the markets. Cash balances increased for the first time in four months and the net share of investors taking out protection against a correction increased as well.

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Most investors forecast equity markets to peak in 2018, with 25 percent placing bets on the first quarter, 30 percent in the second and 28 percent during the last six months of the year.


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A “policy mistake” from the European Central Bank or the Federal Reserve in their bid to regulate monetary policy was the most important risk indicated by 23 percent of participants. This came ahead of a global crash in bonds and a debt crisis in China.
Also, 83 percent of participants indicated that they consider the bond market to be over-valued, 2 percent lower from a record-high 85 percent in October. Being long Bitcoin was also the “most crowded” trade for the second time, trailed by positions in U.S. and Asian tech giants.

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