BAML: Investors Bullish on Euro Equities, Despite Political Uncertainty

A net 83% of investors believe US equities are overvalued, with allocations dropping to their lowest levels since January 2008.

Despite geopolitical uncertainty, market practitioners are increasing allocations to European equities, according to a survey conducted by Bank of America Merrill Global Research. In the Global Fund Manager Survey, allocations to European stocks reached 15-month highs with a net 48% of investors overweight the sector, relative to a net 27% of investors who overweight last month. Roughly, 172 market participants representing nearly $498 billion in assets responded to the survey.

“In spite of the French Presidential election starting in less than a week, investors’ perception of Europe is increasingly bullish,” stated Ronan Carr, European equity strategist, in a press release. “Although we agree on the allure of Europe’s earnings recovery, complacency looks extremely high.”

The rotation into European equities likely stemmed from investors lowering their exposure to US. stocks. A net 83% of investors believed that US equities are overvalued, with allocations dropping to their lowest levels since January 2008.

“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,” stated Michael Hartnett, chief investment strategist at the bank.

Fewer respondents expect tax reforms to pass before summer recess compared to findings in last month’s survey.  Delays in US tax reforms also jumped to the second-highest most commonly cited tail risk, with 21% of investors holding this view.  European elections raising disintegration risk (23%) was considered the biggest tail risk.

Other key takeaways included:

  • Being long, the US dollar remained as the top most-crowded trade
  • Nearly one-third of the respondents believed global equities are overvalued, near 17-year highs
  • A net 47% of investors felt emerging market equities were undervalued
  • Respondent were bullish on the banking sector, with allocation rising to new all-time highs at a net 32% overweight
  • Cash holdings slightly increased month-on-month to 4.9% from 4.8%; the 10-year average has been closer to 4.5%