A record number of global fund managers believed equities, or shares, were overvalued before markets tipped back this week, according to Bank of America Merrill Lynch (BoAML).
A survey by the bank of 165 global fund managers last week found 34% more thought equities were expensive than those who said they were good or fair value. BoAML said this was the biggest gap in the 17 years it had conducted the monthly poll.
Significantly, it was the US stock market that gave fund managers the most cause for concern: a majority of 81% said it was the most overvalued region following a post-election Trump trade that has extended an eight-year bull market.
Fund managers' US allocation dropped sharply with a net 1% 'overweight' against their global index benchmarks, down from a 13% overweight last month.
The dollar is also considered to be overvalued by a net 32% of managers in the survey, the highest number in 11 years expressing being positive on the US currency as a 'crowded trade'.
According to the Financial Times the US appears to be the most expensive market in the western world using the cyclically-adjusted price earning (Cape) multiple measure of long-term value.
This week the US has been the centre of a global market correction, experiencing its biggest fall since November on Tuesday over concerns that the new US president may struggle to implement his tax-cutting and infrastructure spending pledges. He faces a key vote on healthcare reforms today.
By contrast 44% more of the professional investors polled believed emerging markets were undervalued, despite their rebound last year, with a net 23% viewing Europe as cheap.
Ronan Carr, BoAML's European equity strategist, added: 'Investors are positive on European macro and see more value in equities than in the US, but there is a risk of complacency on French elections.'
Professional investors' caution on the US comes against continued optimism for the global economy with 58% - down from 59% last month - anticipating faster world growth and 57% - up from 55% in February - forecasting improved corporate profits over the next 12 months. The latter is a seven-year high.
As a result their overall allocation to equities is positive, with 48% recording an 'overweight' position against their benchmark – a two-year high. Meanwhile allocation to bonds continues to fall with 65% of managers saying they are 'underweight' fixed income stocks, down from 59% last month, its lowest point in three years.
‘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 said Michael Hartnett, chief investment strategist at BofAML.
The pace of US monetary policy is regarded as key. This month the Federal Reserve raised its funds rate to a range of 0.75%-1%. While a 36% majority of managers saw rising US interest rates as the mostly likely catalyst to end the bull market, the biggest group anticipated rates to peak at between 2.05% and 2.5%, which was some way below the point they thought would hurt stock market confidence.