Record number of fund managers says US equities overalued, BofA-Merrill finds

A record number of fund managers now believed US equities were overvalued, despite lofty expectations for faster economic growth worldwide, the results of a widely-followed survey found.

Global equities were overvalued, a net 34% of respondents to Bank of America-Merill Lynch's March Fund Managers Survey said - the most in 17 years - with a net 81% saying US stocks were the most dearly priced of all.

The equivalent percentages for Emerging Markets and Eurozone stocks were 44% and 23%, respectively.

In parallel, a net 32% said the US dollar had become overvalued, the most since 2006, with 'long-USD' considered to be the most 'crowded trade'.

"Investor positioning argues for a risk rally pause in March/April, with allocation to equities at a two-year high and bond allocation at a three-year low," said Michael Hartnett, chief investment strategist at BofA-ML.

"Policy is the key catalyst for the Icarus trade to fly higher in the coming months."

Nevertheless, while expectations for world economic growth continued to run high, with a net 58% expecting such an outcome, only 10% of fund managers expected the new US administration to approve a tax reform bill before its summer recess began in August.

Expectations for Chinese growth jumped to 11%, the most since 2013.

On the flip-side, worries of so-called 'secular stagnation', that is to say, below-trend growth and inflation, dropped to five-and-a-half year lows.

Higher interest rates (36%) were seen as the most likely trigger for an end to the eight-year bull market and not weaker corporate earnings (21%).

At a net 21% of responses, fund managers' fears around protectionism fell sharply versus the prior month.

The biggest tail-risk was European disintegration according to a net 33% of survey participants, with the possibility of a trade war not far behind at 20% and the risk of a crash in global bond markets (18%).