Stocktake: No hint of irrational exuberance in fund managers

Stocks may be near all-time highs following another banner year, but there’s no hint of euphoria in Bank of America’s latest fund manager survey.

Rather, the mood is decidedly cautious. Amid fears the Federal Reserve may be about to get hawkish, there has been a dash to cash, which now accounts for 5.1 per cent of portfolios. Cash levels above 5 per cent trigger BofA's contrarian buy signal as high cash piles are associated with strong one-, three- and six-month returns.

While cash levels are at their highest level since May 2020, stock allocations are at their lowest point in 14 months. Similarly, the percentage of investors taking lower-than-normal risk has surged.

Although investors are "very cautious", few are "outright bearish", notes BofA's Michael Hartnett. BofA's Bull & Bear indicator is in neutral territory.

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Equity allocations may have plunged, but they remain above historical norms. Investors are especially overweight European stocks and want to further increase exposure over the next year.

Still, BofA’s survey will cheer contrarians. Bull market peaks are associated with irrational exuberance, but there’s no evidence of that right now.