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Equity bulls beware

Equity bulls beware

March 2018

Supriya Menon, Senior Multi Asset Strategist

Investors' unbridled enthusiasm for equities raises a red flag.

Are we seeing signs of irrational exuberance?

February’s market wobble seems to have done nothing to temper investor enthusiasm for risky assets. In the week ending March 14, equity funds attracted a record USD43 billion of investment inflows, according to data from EPFR. That brings this year’s total to USD152 billion – another record – with the lion’s share of that money going into US stocks.

The upshot is that the market now looks much more vulnerable from a technical standpoint.

The 12-week moving average of equity inflows, measured as percentage of net assets held in global equity funds, is now considerably above its two-year average1. It’s rare to see such bullishness so early on in the year (see chart). The same trend can be seen in Bank of America Merrill Lynch's investor survey. This could prove to be source of market tension in the near term, particularly if US monetary policy tightens at a faster pace than investors currently expect. That’s part of the reason why we at Pictet Asset Management Strategy Unit remain neutral on stocks.

Rush into equities

Investor inflows into equity markets, USD mln

equity flows
Source: EPFR. Cumulative weekly inflows covering period 31.12.2007 - 17.03.2018