If you know where to look, there’s lots to buy

Global investors are more bearish today than at any point since the financial crisis. That, at least, is what the latest Bank of America Merrill Lynch (BAML) survey of fund managers tells us. They have, they say, the lowest allocation to equity markets since March 2009. Some data even suggests that, in the US at least, the bond weighting in portfolios exceeds that of equities. That's highly unusual (if you want to make inflation-beating long-term returns, you need equities). So what's spooking managers?

BAML's chief strategist Michael Hartnett puts it down to worries about recession; about trade wars; about high levels of corporate debt; and about "monetary policy impotence" the possibility that central bankers can't do much more to stimulate debt-ridden economies. This makes some sense. But long-term readers will remember that March 2009 was the bottom of the bear market of 2007-2009; and know that stockmarket returns are only partly about these things. Politics (in the form of a trade war, or even a long cold war between the US and China) matters far more to markets than it did a few years ago. But still, barring political apocalypse, the most important factor behind your returns is the price at which you buy.

Here it gets complicated. Markets look pricey, says Societe Generale's Andrew Lapthorne. But look closer and you'll see a huge "polarisation of value". Stocks that operate as bond proxies (ie, that rise with rising bond prices) have become pricier, while "more cyclical and negatively bond-correlated equities have seen valuations slump to levels normally associated with a recession". There are actually many more stocks trading below average valuations than usual. So much so, you could almost say that while the average equity market isn't cheap, given that the overvaluation is concentrated in fewer stocks than usual, the average stock is. If you know where to look, there's lots to buy.

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