BofA Merrill Lynch October Fund Manager Survey finds cash balance falling, investor expectations of Goldilocks rising

• Average cash balance falls to 4.7%, the lowest level in two and a half years, well down from last October’s high of 5.8%
• For the first time in six years, Goldilocks trumps secular stagnation, with a record high 48% of investors surveyed expecting above-trend growth and below-trend inflation; the number of fund managers expecting below-trend growth and below-trend inflation fell 11ppt from last month to 34% in October
• Investors are bullish on bond yields, with 82% of those surveyed indicating they expect bond yields to rise in the next 12 months and a record net 85% saying bonds are overvalued
• Fund managers are positioning for higher yields, rotating over the past month into banks and Japan (assets benefitting from rising rates and inflation) and out of utilities, EM, healthcare and bonds
• Over two-thirds of investors surveyed (68%) think the U.S. will see tax cuts in 2018 but tax reform will not have a big impact on risk assets
• Long Nasdaq is considered the most crowded trade for the fifth time this year (29%), followed by Long US/EU corporate bonds (18%) and Long Eurozone equities (16%)
• A policy mistake from the Fed/ECB is considered as the biggest tail risk to markets by investors (24%); this is followed by North Korea (23%) and a crash in global bond markets (22%)
• Overall growth expectations ticked higher this month, with a net 41% of investors expecting a stronger global economy in the coming year, up from net 25% last month but still well below the high of net 62% in January of 2017

“Cash balances dipped this month but remain somewhat elevated,” said Michael Hartnett, chief investment strategist. “A faster drop in cash leading into 2018 would indicate a sell signal from investors. Icarus remains intact.”

Ronan Carr, European equity strategist, added that, “Europe is in vogue according to global investors, with the overweight in Eurozone equities back near record highs and EPS expectations accelerating. European investors remain positive on the macro outlook and are looking for a global reacceleration.”

“More investors are saying they want to overweight Japan over the next 12 months but that still lags behind Europe and EM,” said Shusuke Yamada, chief Japan FX/Equity strategist. “More ‘Japan catalysts’ may be needed to attract long-term investor interests.”