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.”

Profit expectations neared three-year highs in the May survey, as 56% of managers said global profits would improve over the next 12 months, up from 50% in the April survey.

Fund manager survey cash levels in May remained unchanged from April at 4.9%, still above the 10-year average of 4.5%.

According to the survey’s cash rule, when average cash balance rises above 4.5%, a contrarian buy signal is generated for equities; when the cash balance falls below 3.5%, a contrarian sell signal is generated.

A net 82% of fund managers said the U.S. was the most overvalued region, close to April’s record high. At the same time, a net 20% saw the Eurozone as undervalued, and 44% said they same about emerging markets equities.

In a recent interview with ThinkAdvisor, Christopher Hyzy, chief investment officer of BofA Global Wealth & Investment Management, said, “Emerging markets have the largest opportunity set due to where they’re coming from.

“It’s our most preferable overweight because they’ve been in bear markets, but now they have the ability to not just get up off the floor but to walk and potentially jog.”

In the May fund manager survey, a net 59% of investors were overweight eurozone equities, up from net 48% overweight in April.

Allocation to U.K. equities rose to a net 27% underweight versus net 34% underweight last month.

Japan equity allocation fell for the second month to a net 12% overweight as investors increase their allocation into European equities.

“Although global investors’ allocation to Japanese equities declined for a second month, easing risk factors, better currency levels and fundamentals hint of a possible summer rally,” Shusuke Yamada, chief Japan FX/equity strategist at Merrill, said in the statement.

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