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BofA: Managers’ cash holdings fall to lowest level in 2 1/2 years

Money managers still expect strong global economy; Fed/ECB misstep seen as biggest risk

Average cash holdings declined to 4.7% of managers portfolios in October, the lowest level in two and a half years and down from October 2016's high of 5.8%, said Bank of America Merrill Lynch's most recent monthly fund manager survey released Tuesday.

The October survey also found that a record 48% of managers surveyed expect above-trend growth and below-trend inflation over the next 12 months. Those expecting below trend-growth and below-trend inflation fell 11 percentage points over the month to 34%.

On global growth, a net 41% of investors expect a stronger global economy in the next year, the highest level since May and up from a net 25% in September, but still below January 2017's high of 62%.

The biggest tail risk to markets is a policy mistake from the Federal Reserve or European Central Bank, according to 24% of investors, followed by fear of a conflict with North Korea (23%) and a crash in global bond markets (22%). Last month, North Korea was seen as the biggest tail risk, according to 34% of investors, followed by a Fed/ECB policy mistake (21%) and Chinese credit tightening (15%).

Other findings from the October survey include:

  • 68% of managers surveyed believe there will be tax cuts in the U.S. in 2018. They also believe tax reform will not have a big impact on risk assets.
  • A net 20% of managers think the U.S. dollar is undervalued, down from a net 23% in September, the highest reading since December 2014. Meanwhile, a net 4% of investors believe the euro is overvalued, down from a net 16% last month.
  • A record 85% of mangers think bond markets are overvalued, up from 81% in September, and 82% expect bond yields to rise in the next 12 months. Bond allocations, meanwhile, fell to a net 60% underweight in October, the lowest allocation in seven months.
  • Global equity, U.S. equity and Japanese equity allocations rose to a net 45% overweight, net 21% underweight and net 23% overweight in October, respectively, compared to a net 34% overweight, net 28% underweight and net 12% overweight last month. Eurozone equity and U.K. equity allocations, meanwhile, rose to a net 58% overweight and net 31% underweight in October, respectively, compared to a net 54% overweight and net 35% underweight last month.
  • Emerging markets equity allocations fell to a net 41% overweight, down from a net 47% overweight in September.

"Cash balances dipped this month but remain somewhat elevated," said Michael Hartnett, chief investment strategist at BofA Merill Lynch Global Research, in a news release on the results. "A faster drop in cash leading into 2018 would indicate a sell signal from investors. Icarus remains intact."

The survey of 179 money managers representing $516 billion in assets under management combined was conducted Oct. 6-12.