Allocation to U.S. equities surged 10 percentage points to 19% overweight in August, the highest since January 2015, as global investors continued to buy growth over value both regionally and sectorally, Bank of America Merrill Lynch reported Tuesday.
Sixty-seven percent of respondents in Merrill’s latest fund manager survey said the U.S. was the most favorable region for corporate profits, a record 17-year high.
At the same time, 12% of managers in the survey said they did not expect corporate earnings to improve by 10% or more over the next 12 months, a significant swing from 35% that thought they would in February.
Net 54% of investors were underweight bonds versus net 20% that were overweight global banks. Fund managers said the U.S. Federal Reserve’s tightening cycle would continue.
Average cash balance climbed to 5% in August, up from 4.7% in the July survey and still above the 10-year average of 4.5%.
The fund manager cash rule holds that 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.
“Rising corporate leverage concerns say bonds should outperform stocks, while a weaker profit outlook suggests defensives could outperform cyclicals,” Merrill’s chief investment strategist Michael Hartnett said in a statement. “With investors telling us they are long the U.S., the Fed and cash, our view remains: peak profits, policy and returns.”
The survey was conducted August 3 to 9 among 243 panelists with $735 billion in assets under management.
Fifty-seven percent of respondents cited a trade war as the biggest tail risk to markets for the third straight month, albeit down three points from July. Quantitative tightening and a China slowdown rounded out the top three tail risks, the concerns of 15% and 14% of investors, respectively.
Respondents were split in their views when asked about decoupling in the global economy, with 34% expecting it to continue, 32% seeing U.S. growth decelerating and 28% thinking Asia and Europe would accelerate.
Long FAANG (Facebook, Apple, Amazon, Netflix and Google’s parent Alphabet) + BAT (Baidu, Alibaba and Tencent) perched atop the most-crowded trade list for the seventh consecutive month, cited by 54% of fund managers.