Investors’ macro expectations find the global economy to be just right, with a record high 34 percent citing a Goldilocks scenario of high growth and low inflation, according to the BofA Merrill Lynch May fund manager Survey.
Profit expectations are at a three-year high as net 56 percent of respondents say global profits will improve over the next 12 months.
FMS cash levels remain unchanged from April at 4.9 percent, still above the 10-year average of 4.5 percent.
China has replaced European disintegration as the most commonly cited tail risk for the first time since January 2016, with 31 percent of global fund managers citing Chinese credit tightening as the biggest risk in the market.
Long Nasdaq is seen as the most crowded trade for the first time, knocking long US dollar off the top spot after five months. Despite this, net 23 percent of investors still say the USD is overvalued.
Investors’ views on valuation continue to vary by region with net 82 percent of fund managers thinking that the US is the most overvalued region, near April’s all-time high; while, Eurozone and EM equities are seen as undervalued, at net 20 percent and net 44 percent respectively.
Net 59 percent of investors are overweight Eurozone equities, up from net 48 percent overweight in April and the highest allocation since March 2015. Allocation to UK equities has risen to a net 27 percent underweight versus net 34 percent underweight last month. Japan equity allocation fell for the second month to a net 12 percent overweight as investors increase their allocation into European equities.
“Investor sentiment is bullish,” said Michael Hartnett, chief investment strategist. “But irrationality is not yet visible despite all-time highs in credit and equity markets, robust global EPS and a benign French election result.”
Ronan Carr, European equity strategist, added: “Allocation to Eurozone equities is at its third highest level on record. The recent outperformance seems due for a pause, especially versus the U.S.”
Commenting on the Japanese market, Shusuke Yamada, chief Japan FX/equity strategist said: “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.”