Fund managers are worried about a trade war with China.

Net 24% of investors in September said they expected global growth to slow in the next year, up from net 7% in August and the worst outlook on the global economy since December 2011, Bank of America Merrill Lynch reported Tuesday.

Respondents in Merrill’s latest global fund manager survey increased their average cash balance to an 18-month high of 5.1% in September, up from 5% the previous month.

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.

Asked about the current decoupling in the global economy, 48% of survey participants thought it would end because they saw U.S. growth decelerating, up 16 percentage points from the August survey.

Twenty-four percent said they expected decoupling to continue, and 22% thought Asia and Europe would recouple via accelerating growth, down six points from last month.

“Investors are holding on to more cash, telling us they are bearish growth and bullish U.S. decoupling,” Merrill’s chief investment strategist Michael Hartnett said in a statement. “Fund managers are signaling that they are starting to price in a hawkish Fed.”

The survey was conducted Sept. 7–13 among 244 panelists with total assets under management of $742 billion.

The survey found that allocation to U.S. equities climbed two points to net 21% overweight, the biggest overweight since January 2015. The U.S. is the most-favored equity region globally for the second month in a row as investors buy growth over value both regionally and sectorally, according to Merrill.

When asked about their regional expectations for corporate profits, net 69% of fund managers proclaimed the U.S. to be the most favorable region, a record 17-year high, Merrill said.

Allocation to global equities slid 11 points in September to net 22% overweight, near the 18-month low recorded in the July survey. Investors cut their allocation to eurozone equities by six points to net 11% overweight, an 18-month low.

Fund managers’ allocation to emerging markets equities fell to net 10% underweight, the lowest since March 2016 and a huge reversal from net 43% overweight in April when emerging markets was the most-favored region among respondents.

For the fourth straight month, a trade war remained the top tail risk, cited by 43% of respondents. On Monday, the Trump administration announced duties of $200 billion on Chinese imports, and China responded Tuesday with tariffs of $60 billion on American goods.

The top three tail risks were rounded out by a China slowdown, worrying 18% of investors, and quantitative tightening, 15%.

Long FAANG (Facebook, Apple, Amazon, Netflix and Google’s parent Alphabet) + BAT (Baidu, Alibaba and Tencent) retained its position at the top of the most-crowded trade list for the eighth consecutive month, cited by 36% of fund managers, down 18 points from the August survey.

Sixteen percent said short emerging markets equity was the most crowded trade, and 14% cited long U.S. dollar.

Passive Investing and ETFs

Eighty percent of September’s survey participants responded to the poll’s new section on passive instruments and exchange-traded funds, 48% of which said they actively used ETFs within their portfolios.

Merrill said 21% (weighted average) of fund managers’ assets were allocated to ETFs. Only 13% of respondents said they invested more than 41% of their portfolios in ETFs, but this is two points higher than the allocation of the firm’s private clients.

Eighty percent of investors reported that they used ETFs to gain equity market exposure, versus 9% for corporate bonds and 2% for commodities.

Seventy-seven percent used ETFs to passively track broad equity market indexes. Smart beta and multi-asset lagged far behind at 10% and 4% usage.

— Check out 6 Economic Predictions for Next 5 Years: Northern Trust on ThinkAdvisor.