Fund managers’ allocations to U.S. equities rose by 10 percentage points to 19 percent overweight, the highest level since January 2015 and the first time its been the top equity region in five years, according to a Bank of America-Merrill Lynch survey
Around 67 percent of fund managers said the U.S. profit outlook was the most favorable compared with Japan, Europe, the U.K. and global emerging markets, marking a 17-year high, the survey published Tuesday said.
A net of around 12 percent of the survey respondents think corporate earnings won’t improve by 10 percent or more over the next 12 months, swinging from a net 35 percent thinking they would in February, it said.
In addition, a net 5 percent of the fund managers surveyed now have positive global profit expectations, up 14 percentage points from July when that figure hit its lowest since February 2016, but it was still down 39 percentage points from January, the survey found. It added that this continues to signal underperformance ahead for cyclical versus defensive sectors.
A net 17 percent of fund managers surveyed said they were overweight on eurozone equities, up 5 percentage points from July, ending six months of falling allocations, it said, noting the current level was in line with the long-term average.
Allocations to emerging market equities were stable at 1 percent underweight after the biggest monthly drop in EM equities in the last two years last month, it said, leaving the current level well below its long-term average.
Allocations to Japanese equities rose 1 percentage point to a net 11 percent overweight, but it was still well below two-year highs in mid-2017 of well above 20 percent, it said.
The biggest tail risk for markets remained a trade war for a second month according to 57 percent of fund managers surveyed, although the conviction was slightly lower than July’s around net 60 percent, which was the highest since concerns over European Union sovereign debt in July of 2012, the survey found.
The most-crowded trade remained Long FAANG+BAT (Facebook, Amazon, Apple, Netflix, Google + Baidu, Alibaba, Tencent) for a seventh straight month and was the most crowded trade outright since the long U.S. dollar trade in December of 2015, the survey found.
A net 54 percent of the fund managers surveyed were underweight bonds, while a net 20 percent were overweight on global banks amid investor expectations that the U.S. Federal Reserve will continue to tighten policy, it said. Allocations to global banks jumped 17 percentage points to a net 20 percent overweight, reversing around half the 33 percentage-point drop over the past two months, it said.
The average cash balance rose 0.3 percentage point to 5.0 percent in the August survey, compared with a 10-year average of 4.5 percent, signalling a buy call for seven months, it said; the survey has found that when average cash balances rise above 4.5 percent, it offers a contrarian buy signal for equities, BofA-ML said.
Allocations to commodities fell 3 percentage points in August to a net 3 percent overweight, but it was still positive and near June’s eight-year high, it said.
In currencies, a net 22 percent of fund managers said they think the Japanese yen is undervalued, the cheapest valuation since 2008, it said.
The survey period ran from August 3-9, with a total of 243 panelists with US$735 billion in assets under management, it said.