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BofA: Managers trading in bonds for higher global equity allocations

Money managers' global equity allocations climbed to a two-year high in January, while their global bond and cash allocations fell to four- and five-year lows, respectively, said Bank of America Merrill Lynch's most recent monthly fund manager survey released Tuesday.

Managers' global equity allocations rose to a net 55% overweight this month, up from a net 48% in December, while their global bond allocations fell to a net 67% underweight, compared to a net 59% underweight last month. Investors are now the most overweight equities relative to government bonds since August 2014, Bank of America Merrill Lynch said.

At the same time, managers' average cash holdings declined to 4.4% of their portfolios from 4.7% in December.

The January survey also found that investors are divided on the expected timing of equity markets peaking. The most popular response was "2019 or beyond," according to 30% of survey respondents. Last month, the majority of respondents said the second quarter of 2018.

On global growth, a net 47% of investors said they expect a stronger economy over the next 12 months, up from a net 31% in December.

Profit expectations also improved in January, with a net 15% of investors predicting global corporate earnings will rise 10% or more over the next year, the highest reading since 2011. Some 57% of investors also want to see companies increase capital spending, up from 52% last month.

Inflation and/or a crash in global bonds markets is now viewed as the biggest tail risk to markets, according to 36% of investors, up from 15% in December. That was followed by a policy mistake from the Federal Reserve or European Central Bank, which was cited as the top risk last month with 23% of respondents. That number dropped to 19% in January.

Other findings from the January survey include:

  • A net 11% of investors expect the U.S. yield curve will flatten in 2018, the highest level in more than two years and up from a net 8% in December;
  • U.S. equity allocations fell to a net 17% underweight in January, compared to a net 15% underweight last month;
  • Eurozone equity allocations remained unchanged at a net 45% in January; and
  • Emerging markets equity and Japanese equity allocations rose to net overweights of 41% and 27%, up from net overweights of 34% and 24% last month, respectively.

"Investors continue to favor equities," said Michael Hartnett, chief investment strategist at BofA Merill Lynch Global Research, in a news release. "By the end of Q1, we expect peak positioning to combine with peak profits and policy to create a spike in volatility."

The survey of 213 money managers representing $591 billion in assets under management combined was conducted Jan. 5-11.