Upbeat investors pick equities, property, cut back on bonds

An elderly pedestrian walks past hoardings advertising apartments at a new Bellway housing development in the suburb of Stepney in London. Demand for real estate rose to a net 6% overweight, its highest overweight position in eight years.

Reuters

London

Global investors pumped up their holdings of equities and real estate in June and cut back on bonds, reflecting their more enthusiastic outlook for the world’s economy, a closely watched survey showed yesterday.

But investors also fretted that equities may be overvalued and that eurozone periphery debt and US high-yield bonds were crowded trades.

The monthly survey by Bank of America Merrill Lynch, which polled 167 fund managers with combined assets of $422bn, showed asset allocation to equities rose to a net 48% overweight position in June from a net 37% last month.

The net reading shows the difference between overweight and underweight positions.

Demand for real estate rose to a net 6% overweight, its highest overweight position in eight years.

Extra stimulus from the European Central Bank, which cut eurozone deposit rates to negative levels this month, helped stoke the appetite for riskier assets.

“Overall, the tone is very, very, very optimistic, especially in the eurozone,” said Obe Ejikeme, European equity and quant strategist at BofA.

Eurozone equity holdings rose to a net 43% overweight, the second highest overweight position since July 2007, before the global financial crisis.

At the same time, however, a net 15% of investors think global equities are overvalued, the measure’s strongest response since 2000.

Overall allocation to relatively safe bonds fell to a net 62% underweight from a net 55% last month, with a net 75% of investors regarding them as overvalued.

Cash levels dropped to 4.5% from 5%, as investors grew more confident about putting their money to work.

Some 39% of investors think long eurozone peripheral debt is the most crowded trade, and 28% think US high-yield is too packed.

Yield-hungry investors have been pouring cash into Europe’s peripheral debt, sending yields of Italy, Spain and Ireland – countries prominent in the eurozone debt crisis – to record lows.

US high-yield debt, meanwhile, is yielding less than emerging market debt, even though the average credit rating of the asset class is lower.

Reflecting increased risk appetite, investors moved to an overweight position in global emerging equities for the first time since Nov 2013, at 5% net overweight from 11% underweight in May.

The possibility of debt defaults in China has become the most significant risk for investors, followed by “asset mania”, a new category in the survey.

“There is a general underbelly of feeling that the risks that are out there in China are not going to go away any time soon, they have built up over a number of years,” Ejikeme said.

“The fear is asset manias create systemic problems down the road.”

Geopolitical risk dropped to third place, from first place last month. The survey was taken before fighting in Iraq escalated last week.