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Managers more bullish on U.S. equities, corporate profits – BofA

Money managers regard the U.S. as the most favorable region for equities for the first time in five years, said Bank of America Merrill Lynch's monthly fund manager survey released Tuesday.

Managers' allocations to U.S. equity rose 10 percentage points over the past month to a net 19% overweight. This not only makes the U.S. the top equity region by overweighting for the first time in five years, but also the biggest overweight since January 2015. When asked about their regional expectations for corporate profits, a net 67% of those surveyed found the U.S. to be the most favorable region, a record 17-year high.

This month's survey saw a 5-percentage-point increase in allocations to eurozone equities, leaving allocations to the asset class at a net 17% overweight, putting an end to six months of declining allocations. Also, the allocation to emerging markets equities held at net 1% underweight, having fallen 44 percentage points since April 2018.

Managers' allocations to U.K. equities saw the biggest one-month drop since May 2016, down 10 percentage points to net 28% underweight, as concerns of a "no deal" Brexit rise.

The average cash balance climbed to 5% this month from 4.7% in July, but is still above the 10-year average of 4.5%.

Allocation to the technology sector dipped 1 percentage point to a net 32% overweight, making it the most favored sector still; allocations to health care dropped 5 percentage points to net 19% overweight, making it the third-biggest overweight among survey participants. Banks jumped to second with a 20% net overweight.

A trade war remains the tail risk most commonly cited by respondents (57%) for the third straight month, followed by quantitative tightening (15%) and a China slowdown (14%). A trade war was cited as the biggest risk by 60% of respondents the prior month.

When asked about decoupling in the global economy, 34% expect it to continue, while 32% see U.S. growth decelerating, and 28% think Asia and Europe will accelerate.

Managers also think the Fed tightening cycle will continue, with net 54% underweight bonds and a net 20% overweight global banks.

Another finding from this month's survey shows that managers are buying banks and continuing to move to cash and U.S. equities. In addition, survey respondents have revealed that they are selling such commodity and defensive sectors as materials, energy and U.K. equities.

"Rising corporate leverage concerns say bonds should outperform stocks, while a weaker profit outlook suggests defensives could outperform cyclicals," said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, in a news release about the survey results. "With investors telling us they are long the U.S., the Fed and cash, our view remains: peak profits, policy and returns."

The survey of 243 money managers representing a total of $735 billion in assets under management was conducted Aug. 3-9.