BofA Merrill Lynch February Fund Manager Survey finds macro optimism surging

• Macro optimism is surging, with 23% of investors saying they expect a “boom” (above trend growth and inflation) compared to 1% one year ago
• Meanwhile, 43% said they expect “secular stagnation” (below trend growth and inflation), down sharply from 88% one year ago
• The BofAML Global FMS Macro Indicator [1] is in “buy” territory; cash levels dipped to 4.9% in February, from 5.1% in January, but levels are still higher than two months ago, which is bullish for risk assets
• Investors identify European elections raising disintegration risk as the biggest tail risk (36%), closely followed by a trade war (32%) and a crash in global bond markets (13%)
• A net 28% of investors – the highest proportion since September 2006 – think the US dollar is overvalued; Long USD also seen as most crowded trade (41%)
• Investors rank “protectionism” as the most likely bear market catalyst (34%), followed by “higher rates” (28%) and a “financial event” (18%)
• Gold viewed as the best protectionist investment, with a record net 15% of investors considering it undervalued
• Allocation to Eurozone equities surges to 8-month highs, with net 23% overweight from net 17% overweight last month.
• While allocation to Japanese equities remains little changed, the proportion of investors who want to be overweight over the next year has risen to net 14% (up 5ppt from January)
• EM equities allocation improves to net 5% overweight from net 6% underweight last month

“Investor allocation and positioning continue to reflect expectations of a higher US dollar. A more hawkish stance by Janet Yellen at this week’s Humphrey Hawkins testimony could provide an upside catalyst for the dollar, given the dovish market pricing of rate hikes,” said Michael Hartnett, chief investment strategist.

Manish Kabra, European equity quantitative strategist, added that, “While global fund manager sentiment towards Europe improved slightly, there is an increased fear of European political risk, with sentiment towards French equities particularly low.”