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World's Investment Houses Rotate Out Of "Expensive" US Into Eurozone - BoA Merrill Lynch

Tom Burroughes, Group Editor , 21 April 2017


One of the largest shifts in asset allocations in almost two decades - favouring the eurozone at the expense of the US market - is under way, a global survey shows.

Worries about the French election result in May and uncertainties linked to the UK departure from the European Union weren’t enough to deter investors from switching into eurozone equities at the expense of US stocks in April, according to the monthly Bank of America Merrill Lynch survey this week.

In recent weeks, investment commentators have remarked that the US bull market in equities is more than nine years’ old and due for a correction, bringing the “Trump trade” seen since last November to a halt. It appears that the wider investment community is now acting on that view.

In what was described by the US bank as the fifth-largest asset rotation since 1999, the shift across the Atlantic saw a net 48 per cent of fund managers saying they were bullish, or overweight, eurozone stocks, and a net 20 per cent were bullish, or underweight, US stocks. The US position is the weakest since 2008. A record number of investors (net 83 per cent) find US stocks to be overvalued, while 32 per cent say global equities are overvalued, near 17-year highs

The survey was carried out from 6 to 12 April; respondents oversee a total of $593 billion in assets. 

“Investors are showing love for Europe and scrambling out of US equities, as the majority find US stocks overvalued and perceive a risk of delayed US tax reform,” Michael Hartnett, chief investment strategist, said. 

Among other findings, the survey showed that a net 44 per cent of investors are overweight emerging market equities, up from net 18 per cent underweight in March and the highest allocation in five years. 

One concern investors have is whether lawmakers in Washington DC will enact tax reforms before the summer break. Only five per cent of surveyed investors expect action.
Holdings of cash – at 4.9 per cent of all assets – remain above the 10-year average of 4.5 per cent, suggesting caution about markets remains.

A net 21 per cent of fund managers think the US dollar is overvalued, down from net 32 per cent last month, but long USD is still perceived as the most crowded trade (27 per cent).

Against a background of Brexit and concerns about the type of president that might be elected in France, fund managers said EU disintegration is the biggest tail risk (23 per cent) - though this fear has dropped sharply in the past two months - closely followed by a delay in US corporate tax reform (21 per cent) and trade war (17 per cent).

Within Europe, the UK remains the least preferred region and the relative positioning versus eurozone equities is within 1 per cent of an all-time low

Japan equity allocation saw its first observable decline since November last year, but investors are still overweight (15 per cent), the survey added. Shusuke Yamada, chief Japan FX/equity strategist said:
“Investors’ perception of Japanese equities is being negatively influenced this month by the lowered expectation for US tax reform and the tail risk of EU disintegration, which weigh over EUR/JPY and USD/JPY.”


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