The Bank of America Merrill Lynch (BofAML) November Fund Manager Survey has found that a record amount of investors (16 percent) are taking above-normal levels of risk in their investment.
The report, which involved 178 participants with $533 billion assets under management, found that average cash balance fell to 4.4 percent from 4.7 percent last month, the lowest level since October 2013 and below the 10 year average of 4.5 percent.
Meanwhile, the net share of investors taking out protection against a correction in markets decreased this month to -37 percent, and a record high of nearly half (48 percent) of surveyed investors indicated that equities are overvalued.
The report also revealed that a record amount (56 percent) of investors expect above-trend growth and below-trend inflation, and allocation to global equities rose to 49 percent overweight, the highest level since April 2015.
However, pessimism toward UK equities continues to rise, currently at 37 percent which reflects a return to lows which were last seen during the financial crisis. Elsewhere, allocation to Japanese equities rose to 23 percent overweight which is the highest level in two years.
With regard to trade, long Nasdaq is considered the most crowded (34 percent) for the sixth time this year, followed by short volatility (26 percent) and long US/EU/EM high yield corporate bonds (18 percent).
According to the report, investors are divided on the likely impact of Fed balance sheet reduction and ECB tapering on equities, with 42 percent expecting lower stock prices and 35 percent expecting stocks to go higher.
Finally, over a quarter (27 percent) of those surveyed indicated that the biggest tail risk to the markets is a policy mistake from the Fed/ECB, followed by a crash in global bond markets (22 percent) and a flash crash caused by ‘market structure’ (13 percent).
Chief investment strategist at BofAML, Michael Hartnett, said: “Icarus is flying ever closer to the sun, and investors’ risk-taking has hit an all-time high. A record high percentage of investors say equities are overvalued yet cash levels are simultaneously falling, an indicator of irrational exuberance.”
European equity strategist, Ronan Carr, added: “UK sentiment is severely depressed and remains the least popular country market for European investors.”