Extreme valuations: Bonds, stocks near bubble territory

Lofty valuations in both bonds and stocks are now seen as one of the biggest risks for markets, as fears of a "valuation bubble" reach record highs, a fund manager poll has shown.

Around 13 percent of managers see "equity bubbles" as the biggest tail risk for markets, up from 2 percent in February, according to the Bank of America Merrill Lynch fund manager survey for April, out on Tuesday.

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In addition, the proportion of investors saying equity markets were overvalued reached its highest level since 2000.

A net 25 percent of fund managers polled said global equities were overvalued, up from a net 23 percent in March and 8 percent in February, but well-short of the record high of 42 percent hit in 1999.

One hundred and seventy-seven investors, with a total of $494 billion under management, were polled by BofA ML, both online and on the phone.

Bond valuation fears at record high

At the same time, the number of investors concerned bond market valuations have become stretched has reached a new high in the survey's history. Some 84 percent of the global panel said bonds were overvalued, up from a net 75 percent last month.

Global fund managers were most concerned about valuations in the U.S., with almost 70 percent viewing it as the priciest region in the world.

A bull run for equities is now in its sixth year on the back of extra liquidity provided by several central banks, including the U.S. Federal Reserve.

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The main concern for many in the market is that quantitative easing (QE) may have artificially pushed stocks higher during a period when earnings and data fundamentals were relatively weak.

This bond-buying from QE helped the pan-European FTSE Eurofirst 300 and the Japanese Nikkei 225 hit 15-year highs last week. Meanwhile, German bond yields are seen heading into negative territory and U.S. Treasurys stubbornly remain below 2 percent.

"April's survey offers further proof that global investors are front-running global monetary policy. We are seeing a form of rational exuberance in Europe where a positive view on stocks is supported by fundamentals – but investors no longer believe valuations are cheap," said Manish Kabra, European equity and quantitative strategist, at BAML.

Dollar bulls hang on

As investors prep for a rise in interest rates in the U.S., they expect currencies to come under increasing volatility.

Around 18 percent of the investors polled said the foreign exchange market was more vulnerable than any other asset class, a rise of 5 percentage points on the previous month.

An increasing number of investors said the dollar was overvalued against the euro and the yen. However, the majority of investors still expected the dollar to appreciate and the euro to depreciate in the coming year, according to the survey.

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