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Investor sentiment was less bullish in February than in January, according to the latest global fund manager survey from Bank of America Global Research.

In February, investors rotated into deflation winners — U.S. equities, technology, bonds and emerging markets equities — and away from inflation assets, such as cash, banks and energy.

“Investor sentiment is less bullish than last month and shows full capitulation into deflation assets,” chief investment strategist Michael Hartnett said in a statement. “We stay irrationally bullish.”

U.S. equity allocations shot up 16 percentage points to net 19% overweight, the highest level since September 2018, while allocation to global equities increased one point to net 33% overweight, a 20-month high.

BofA said the bullishness for U.S. equities in part reflected investors’ conviction that rates would stay within the current 1.4% to 2% range, which 58% of fund managers considered bullish for risk assets.

Still, emerging markets equities continued as fund managers’ most preferred region for the fourth consecutive month, rising three points to net 36% overweight.

Among sectors, fund managers in the February survey liked technology best, with allocations rising nine points to net 40% overweight, the highest level since October 2016.

Investors’ average cash balance fell to 4% from 4.2% in the January survey, the lowest level since March 2013, and well below the fund manager five-year average of 4.9%.

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.

Allocation to cash fell six points to net 9% overweight, the lowest cash allocation since April 2015.

Net 54% of survey participants said the U.S. dollar was overvalued, the second highest level since 2002. BofA said this helped explain the rotation into U.S. equities out of European ones, which fell by eight points to net 19% overweight.

The survey was conducted Feb. 6 to 13 among 221 panelists with $676 billion in assets under management.

Coronavirus Fears

BofA said rising COVID-19 fears in February, especially around Chinese growth, led to the first drop in fund managers’ global growth, profits and inflation expectations since last October.

Global growth expectations fell 18 points to net 18% — with 48% expecting stronger growth in the next 12 months and 29% weaker growth. This was down from net 36% in January, but still well above 2019 lows.

The spreading coronavirus hasn’t derailed growth in the U.S. or most developed countries, according to one American analyst, but it is changing economic, bond market and corporate earnings outlooks.

Fund managers in the BofA survey also slashed their expectations for inflation by 17 points, with only net 40% expecting higher global CPI in the next year.

Asked what would likely cause a material increase in inflation expectations, and therefore a rotation out of deflation winners, here’s how fund managers responded:

  • Modern Monetary Theory – 26%
  • A G7 commitment to infrastructure spending – 24%
  • Election of progressive liberal in November’s U.S. presidential election – 18%

Sixty-seven percent of investors surveyed expected below-trend growth and inflation over the next year, up five points from January.

Net 6% of investors believed growth stocks would outperform value stocks over the next 12 months. BofA said this was the biggest jump in favor of growth since December 2014 and the highest overall reading since July 2008.

COVID-19 is on investors’ minds for sure, but in the February survey, fund managers saw greater tail risks: Twenty-six percent cited the outcome of the U.S. presidential election, 22% bursting of the bond bubble, 21% coronavirus and 11% monetary policy impotence.

February’s most crowded was long U.S. tech and growth stocks, according to 51% of fund managers, followed by long U.S. Treasuries, 17%, long investment grade corporate bonds, 13%, and short volatility, 8%.