| LONDON, Sept 13
LONDON, Sept 13 Global investors, wary of a bond
selloff and overvalued equities in the developed world, have
increased cash holdings in portfolios and upped emerging market
equity positions to their highest in three and a half years, a
survey showed on Tuesday.
The latest monthly survey by Bank of America Merrill Lynch
showed that fund managers reckon stocks are their most
overvalued since 2000, and equities and bonds combined are near
their most overvalued ever.
The poll of 208 fund managers managing $579 billion was
carried out from Sept 2-8 against a backdrop of swirling
expectations on when the Federal Reserve might raise U.S.
Higher U.S. interest rates could spell trouble for bonds,
equities and emerging markets. But fund managers remained drawn
to emerging markets by the relatively high yields on offer, the
same reason they increased their exposure to cash, BAML said.
U.S. 10-year yields this week hit their highest since June
and 10-year German yields turned positive for the first time
since then, too, stirring memories of last year's "flash crash"
when Bund yields rose 100 basis points in less than two months.
The BAML poll showed cash holdings rose to 5.5 percent in
portfolios, though that is below July's 15-year high of 5.8
percent. Asked about high cash weightings, 42 percent of those
polled said they had "a bearish view on markets" and 20 percent
attributed it to "preference for cash over low-yielding
The growing preference for cash came even as confidence in
the world economy strengthened - 26 percent of poll participants
expected improvement in the coming year, the highest level in
While 83 percent of funds expected the European and Japanese
central banks to keep interest rates negative in the coming
year, a net 61 percent also are bracing for higher global
10-year bond yields. That's up from 47 percent in August.
"Risk assets are nonetheless vulnerable to a bond shock,"
BAML said, adding that 82 percent of survey participants deemed
bond prices "frothy".
The net overweight on equities shrank to just 1 percent in
September, compared with 9 percent in August. The underweight on
bonds rose 2 percentage points to 45 percent, an eight-month
On a regional basis, Japanese equities were the most
unloved, with the biggest underweight since 2012. But the
largest swing was in U.S. equity allocations, which fell to a 7
percent underweight from last month's 11 percent overweight.
Investors continued to pile into emerging market equities,
where a net 24 percent said they were overweight versus 13
percent last month - the biggest in 3 1/2 years, the survey
Emerging market stocks have outperformed their developed
market peers this year, with MSCI's index having gained over 12
However, the sector is among those relying on zero or
negative interest rate policies (NIRP) in developed countries.
"The most vulnerable longs are all NIRP winners," BAML said,
citing also high-grade stocks, emerging debt, U.S. and European
corporate bonds and real estate.
(Reporting by Sujata Rao; Editing by Jamie McGeever and Larry