(May 9, 2013) — Investors should prepare for a big equities pricing correction as the raging bull market of the past few months threatens to come to a close.
Bank of America Merrill Lynch’s chief investment strategist Michael Hartnett sent a note to investors on Thursday warning that the risk of a melt-up in stocks was high, and rising.
“Performance (equities have significantly outperformed bonds over one and three year periods) versus positioning puts pressure on asset allocators. And the correction we expected was too piecemeal for investors to buy the dip they wanted,” he wrote in the latest monthly BoA Merrill Lynch Global Research report.
CIOs who are interested in spotting the signs of the market reaching its peak should look for further price improvements in hitherto laggard sectors, along with any move in stocks which causes jawboning (threats of further action) from the Fed, Hartnett suggested.
And BoAML believes the most likely catalyst to provoke volatility and setbacks to risk assets is “hot or frigid data” that says the economy is performing better than expected.
BoAML is currently long on US banks, Japan, and EU best of breed. Hartnett acknowledged that China, EU banks and BRIC resources are more obvious contrarian trades, but said he “would rent, rather than own these trades”.
The best performing equities in the past month in terms of total returns have been Portuguese, Italian and Spanish equities, with Indian, Turkish and French not far behind – although all of these paled in comparison with Greek government bonds which have seen a return of 20.4%.
The poorest equity performers have been Israeli and Mexican stocks, returning -2.1% and 0.6% respectively.
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