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Managers holding more cash, allocating less to equities – BofA

Money managers' global equity allocations made the largest one-month decline in two years in February after climbing to a two-year high the previous month, while their global bond allocations fell to a record low, said Bank of America Merrill Lynch's monthly fund manager survey released Tuesday.

Managers' global equity allocations dropped to net 43% overweight this month, down from net 55% overweight, while their global bond allocations fell to a record low of net 69% underweight, compared to a net 67% underweight last month.

At the same time, managers' average cash holdings rose to 4.7% of their portfolios this month, up from 4.4% in January.

On global growth, a net 70% of investors now believe the global economy is in "late cycle," the highest since January 2008. Expectations for faster global growth fell 10 percentage points to 37% in February.

In terms of interest rates, only 5% of fund managers surveyed said they expect global interest rates to be lower in the next year, while 80% expect them to rise.

Profit expectations dropped in February, with a record net 24% of investors surveyed saying global corporate balance sheets are overleveraged. The net percentage that would like to see companies return cash to shareholders remains close to 2009 lows.

A net 45% of investors surveyed placed an inflation-induced bond crash at the top of the list of tail risks, while a net 18% believed the top tail risk to be a policy mistake by the Federal Reserve or European Central Bank, and 13% to be market structure.

Other findings from the February survey include:

  • A net 5% of investors expect the U.S. yield curve will flatten this year, down from 11% in January, the highest level since December 2015.
  • Allocations to eurozone equities dropped to a one-year low of net 41% overweight.
  • Allocations to emerging market equities held at net 41% overweight, while allocations to Japanese equities ticked down slightly to 26%.
  • Investors expect Chinese GDP to grow at an average rate of 6.1% over the next three years, up 1.1 percentage points since September 2015.

"While this month's survey shows that investors are holding on to more cash and allocating less to equities, neither trait moves the needle enough to give the all clear to buy the dip," said Michael Hartnett, chief investment strategist, in a news release announcing the survey results.

The survey of 196 money managers representing $575 billion in assets under management was conducted Feb. 2-8.