Buy high, say fund managers in new survey

Stocktake: Belated sell-off for stocks, worries about ‘President’ Le Pen and men v women

“President” Marine Le Pen? “Most fund managers seemingly believe that even if Le Pen does win, it would not be the end of the world.” Photograph: Alain Jocard/AFP Photo/Getty Images

A question: if you thought stocks were more overvalued than at any time since the dotcom bubble, would you pile into equities? No? Well, maybe that’s why you’re not a fund manager.

According to Merrill Lynch’s latest monthly survey, more fund managers feel global equities are overvalued than at any time since 2000. The US is seen as especially expensive, with a a net 81 per cent of fund managers saying US stocks are overvalued. Despite this, global equity allocations and risk appetite are at two-year highs.

Still, contrarian alarm bells should not be ringing just yet. That’s because cash levels, despite falling in recent months, remain high by historical standards. Overall, investor positioning argues for a “pause” in the risk rally, says Merrill, rather than indicating the end is nigh.

As for fund managers’ tendency to buy in the face of overvaluation concerns, it may not be as irrational as it seems. After all, data shows valuation has next to no impact on 12-month returns.


Still, such pro-cyclical behaviour is hardly wise. At March 2009’s generational market bottom, a net 42 per cent of fund managers saw stocks as undervalued, but they continued to underweight equities. Countless other surveys confirm that fund managers are well able to see when the crowd is wrong; they just don’t want to bet against it.

Belated sell-off for stocks

A relatively minor 1.2 per cent decline in stock markets shouldn’t be front-page news. Still, the commotion following last Tuesday’s falls is understandable, given investors had almost forgotten that stocks occasionally decline.

The S&P 500 had gone 109 trading days without suffering a 1 per cent decline, the longest such streak since 1995. A raft of potential explanations were advanced: US president Donald Trump’s political difficulties, doubts about his ability to enact significant tax cuts and the Federal Reserve’s rate-hiking plans.

You could argue such a decline was simply a question of time, following a freakishly long period of calm. There has been less volatility in 2017 than any year since 1965. The Vix, or fear index, has been lower for longer than any other time in history.

As StockTake noted last week, above-average returns have followed in the past when extremely long streaks finally came to an end. Accordingly, don't read too much into Tuesday's decline; for now, talk about a return to volatility or an end to the Trump trade is premature.

Why worry about “President” Le Pen?

Something rare happened last week: for the first time, European indices have now outperformed the US’s since Trump’s election win. Isn’t everyone meant to be worrying over the prospect of “President” Marine Le Pen? Well, French polling data has alleviated such worries lately, but most fund managers seemingly believe that even if Le Pen does win, it would not be the end of the world.

According to Merrill’s aforementioned survey, just 27 per cent of fund managers expect a Le Pen victory to catalyse a double-digit percentage decline in European stocks. Additionally, European equity allocations have hit an 11-month high.

Investors may be sanguine because constitutional hurdles and public opinion mean Le Pen would likely not succeed in taking France out of the EU. Alternatively, they may have become conditioned to view all selloffs as buying opportunities. If stocks can survive Brexit and Trump, why not Le Pen?

Whatever the reason, Merrill says there is a “risk of complacency”. It warns a Le Pen win would wipe 13-23 per cent off European indices; Frexit would trigger a “full-blown bear market”.

UBS, too, says Le Pen's chances "should not be underestimated". It reckons she has a 40 per cent chance of victory, advising investors to "expect a few twists and turns in the presidential race yet."

‘When Harry Fired Sally’

Bad boys are treated very differently to bad girls in ordinary life and on Wall Street. According to a new US study, When Harry Fired Sally: The Double Standard in Punishing Misconduct, 9 per cent of men advisers have committed serious financial transgressions, compared to 3 per cent of women advisers. Men were twice as likely to be repeat offenders, according to the study, which examined 1.2 million financial advisers over a decade.

Misconduct by men also tended to be more serious, resulting in heftier legal bills.

Nevertheless, women advisers guilty of misconduct were 20 per cent more likely to lose their jobs and 30 per cent less likely to find new jobs. Firms also appear more suspicious of their women employees; men were more likely to be accused of misconduct by customers but women were more likely to be accused by their own firms.

Could something other than sexism be at play? Unlikely: women were no more likely to be fired than men at firms where there were many women executives, but 42 per cent more likely to be fired at men-dominated firms.