A surge in optimism among investors has led to increased exposure to equities and cyclicals as recession concerns fade, according to Bank of America Merrill Lynch's monthly fund manager survey released Tuesday.
Recession concerns have nearly vanished. A net 6% of money managers surveyed expect a stronger global economy in the next year, up 43 percentage points from last month, marking the biggest month-on-month jump on record.
Inflation expectations surged 29 percentage points to a net 31% of managers expecting a higher global consumer price index in the next year.
A net 61% of managers said they expect the global bond yield curve to steepen in the next year, up from -30% in December 2018 and the highest level in three years.
More than half of managers surveyed (52%) expect equities to be the top performing asset class in 2020, followed by commodities (21%) and cash (10%).
The U.S. dollar is expected to depreciate in the next 12 months, say 37% of managers surveyed; marking the weakest outlook on the U.S. dollar since September 2007.
Cash levels among managers fell to 4.2% in November from 5% last month, the biggest monthly drop since November 2016 and lowest cash balance since June 2013. Allocation to cash fell 20 percentage points to net 18% overweight, the lowest cash allocation since November 2015.
Allocation to global equities, meanwhile, jumped 20 percentage points on a month-over-month basis to net 21% overweight, the highest level in one year.
This month, managers made a risk-on rotation into value stocks, equities, banks and Europe, and out of cash, large-cap, utilities, staples and fixed income.
Concerns of a trade war continue to top the list of tail risks cited by managers, at 39%, followed by a bond market bubble (16%), monetary policy impotence (12%) and a China slowdown (11%).
Long U.S. technology and growth stocks (30%) tops the list of the most crowded trades identified by fund managers, at 30%, ahead of long U.S. Treasuries (21%) and long investment-grade corporate bonds (20%).
"The bulls are back," said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, in a news release about the survey results. "Investors are experiencing FOMO – the fear of missing out – which has prompted a wave of optimism and jump in exposure to equities and cyclicals."
The survey of 230 money managers representing a total of $700 billion in assets under management was conducted Nov. 1-7.