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Fund managers had grown fearful that technology stock valuations had soared too high before the recent sell-off rattled markets this week.
Close to three quarters of a sample of 180 global fund managers described global internet stock valuations as looking ‘expensive’ or ‘bubble-like’ in Bank of America Merrill Lynch’s June global fund manager survey conducted in the week to 8 June.
On Friday 9 June, US technology stocks fell heavily in response to investment bank Goldman Sachs warning investors had become complacent to their risks and were treating them like defensive, utility stocks. This sent a tremor around world stock markets on Monday, although yesterday and last night saw a recovery.
A record number of respondents in the survey also described equities, or shares, as overvalued, with around 44% of fund managers taking this view, up from 37% in May.
While sentiment turned cautious on tech valuations, Bank of America Merrill Lynch pointed to growing cash levels from 4.9% to an average of 5% over the month. They view this as a sign that there is less ‘irrational exuberance’ evident amongst investors, in comparison to the tech boom back at the turn of the century.
The tech bubble saw share prices of many technology and internet companies became completely disconnected from traditional valuation metrics. However, from 2000 onwards the bubble started to collapse and the share prices of these companies plummeted.
In their note on Friday, Goldman Sachs analysts said US technology stocks were not as expensive today as they had been before the bubble burst in 2000, starting a three-year bear market.
Bank of America Merrill Lynch noted that expectations for profit growth fell over the month, with 43% anticipating profit increases over the next 12 months. This was down 13% from May’s survey.
Expectations for global growth continued to fall during May, having peaked in January. Since then, the number of fund managers who anticipate faster global growth fell 23% to 39%.
The bounce in value stocks which started late last year appears to be running out of steam, according to the fund manager survey.
During May, a review of portfolio positioning showed a rotation out of commodity-related stocks, alongside banks and basic materials. Investors sought safety, moving into staples, utilities and cash.
In the run-up to the general election, the UK also turned out to be a surprise destination for global fund managers as some restored investments in the country to the level they were before the Brexit vote.
Fund managers highlighted China tackling its debt crisis as the biggest potential ‘tail risk’ facing markets, followed by a global bond market crash as interest rates rise and a delay in president Trump cutting corporate tax to stimulate the US economy.
The fund managers surveyed are responsible for $596 billion (£467.5 billion) in assets. The survey was carried out between 2 and 8 June.