BofA: Managers remain optimistic on global growth, but dollar seen as overvalued

Money managers are optimistic on global growth and inflation, while the highest amount of respondents believes the U.S. dollar is currently overvalued in the past 10 years, according to Bank of America Merrill Lynch’s monthly fund manager survey released on Tuesday.

The February survey found that a net 59% of managers expect the global economy to improve over the next year, down from a net 62% in January, which had been the highest reading in two years. The February reading was still up from two months previously, when a net 57% in December said the global economy would improve over the next year.

Meanwhile, for February a net 81% expect a higher global consumer price index over the next year, down from 83% in January and 84% in December.

Average cash holdings, meanwhile, dropped to 4.9% in February, still high according to the survey report, but down from 5.1% in January.

Also, a net 28% of investors think the U.S. dollar is overvalued, the highest number since September 2006 when more than 30% of investors found it overvalued. A net 22% said in January the U.S. dollar was overvalued. Forty-one percent of investors also said going long on the U.S. dollar was the most crowded trade in February.

“Investor allocation and positioning continue to reflect expectations of a higher U.S. dollar,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, in a news release on the survey results. “A more hawkish stance by (Federal Reserve Chairwoman) Janet Yellen at this week’s Humphrey Hawkins testimony could provide an upside catalyst for the dollar, given the dovish market of rate hikes.”

European elections raising disintegration risk of the European Union was cited as the biggest tail risk by 36% of investors in February, followed by trade at 32% and crash in global bond markets at 13%.

The February survey also found:

  • 23% of investors expect above-trend growth and inflation over the next year, up from 1% one year ago, while 18% expect above-trend growth and below-trend inflation and 15% said below-trend growth and above-trend inflation; 43%, meanwhile, expect both below-trend growth and inflation.
  • Global equity allocations came in at a net 39% overweight in February, the same as the previous month, while allocations to eurozone equities rose to a net 23% overweight in February from a net 17% the previous month, and emerging markets equity allocations also improved, to a net 5% overweight from a net 6% underweight the previous month;
  • Domestic equity allocations dropped slightly to a net 13% overweight in February from a net 14% in January; and
  • Global bond and commodity allocations in February both rose, to a net 59% underweight and 3% overweight, respectively, from a net 63% underweight and 3% underweight.