Money managers' average cash holdings rose to 4.7% of their portfolios in December, the first increase in four months and up from 4.4% in November, said Bank of America Merrill Lynch's most recent monthly fund manager survey released Tuesday.
At the same time, the percentage of investors that said they are taking above-normal levels of risk fell to a net 11% in December, down from a record net 16% last month.
Fifty-four percent of investors expect above-trend growth and below-trend inflation over the next 12 months, down from a record 56% last month.
Regarding global growth, a net 31% expect a stronger economy over the next 12 months, down from a net 36% last month.
The biggest tail risk to markets remains a policy mistake from the Federal Reserve or European Central Bank, according to 23% of investors (compared to 27% last month); followed by a crash in global bond markets, according to 15% (down from 22%), and a Chinese debt crisis, according to 14%.
Fear of a Fed or ECB policy mistake has been the top tail risk for the past three months and four times in 2017.
Other findings from the December survey include:
- Two-thirds of respondents expect U.S. tax reform to lead to higher bond yields and stocks next year; 3% think it will lead to lower yields and stocks.
- A net 83% believe bond markets are overvalued, up from 81% last month and approaching October's high of 85%. A net 8% of investors expect the U.S. yield curve to flatten in 2018, the highest reading in 18 months.
- On asset allocation, global equity and emerging markets equity allocations fell to net overweights of 48% and 34%, respectively, from net overweights of 49% and 43% last month.
- Eurozone equity and Japanese equity allocations fell to net overweights of 45% and 24%, down from net overweights of 47% and 32% in November.
- U.S. equity and U.K, equity allocations rose to net underweights of 15% and 34%, respectively, up from a net 16% underweight and 37% underweight last month.
"Despite surging credit and equity markets, investors increased their cash balance back into buy territory," said Michael Hartnett, chief investment strategist at BofA Merill Lynch Global Research, in a news release on the results. "This paves the way for more risk asset upside in the beginning of 2018."
The survey of 203 money managers representing $558 billion in assets under management combined was conducted Dec. 8-14.