It’s a ‘Goldilocks’ Economy, Merrill Survey Finds

A record high 34% of investors’ find the global economy to be just right, a “Goldilocks” scenario, according to the May Bank of America Merrill Lynch fund manager survey.

In Merrill parlance, “Goldilocks” describes above-trend growth and below-trend inflation, in contrast to:

• “Boom,” or above-trend growth and inflation

• “Stagflation,” or below-trend growth and above-trend inflation

• “Secular stagnation,” or below-trend growth and inflation

“Investor sentiment is bullish,” Michael Hartnett, chief investment strategist at Merrill, said in a statement. “But irrationality is not yet visible despite all-time highs in credit and equity markets, robust global EPS and a benign French election result.”

The survey was conducted in early May among 213 panelists with a total of $645 billion in assets under management.

It showed that China had replaced possible European disintegration as the most commonly cited tail risk for the first time since January 2016.

Thirty-one percent of global fund managers surveyed cited Chinese credit tightening as the biggest risk in the market. This concern was followed by a crash in global bond markets, cited by 19% of managers, and trade war, cited by 16%.

In April, following the first round of the French presidential election, Mohamed A. El-Erian predicted that a victory by Emmanuel Macron in the May 7 second round would bring sighs of relief across Europe. In the event, Macron won going away.

Long Nasdaq was the most crowded trade in the May survey, replacing long U.S. dollar, which dropped to third place following a five-month run in the top spot. Even so, a net 23% of investors still considered the greenback overvalued.

The second most crowded trade in May was long European equities. “Allocation to eurozone equities is at its third highest level on record,” Ronan Carr, BofAML’s European equity strategist, said in the statement.

“The recent outperformance seems due for a pause, especially versus the U.S.”