Although a dovish Federal Reserve and trade truce with China have caused managers to reduce cash and increase risk, they still expect an earnings recession and debt deflation, said Bank of America Merrill Lynch's monthly fund manager survey released Tuesday.
Money manager global growth expectations have improved from last month's decade low, rebounding 20 percentage points to a net 30% of investors surveyed expecting global growth to weaken over the next year, according to the results of the survey.
Only a net 1% of managers surveyed expect a higher global consumer price index in the next year, the most bearish inflation outlook in seven years. Meanwhile, a net 73% of investors think the business cycle is a risk to financial market stability, an eight-year high.
A record net 48% of investors are concerned about corporate leverage. Global profit expectations remain flat at net 41% of those surveyed saying they expect profits to deteriorate in the next year.
Corporate payout ratios, including share buybacks, are too high, according to a record net 38% of managers.
This month's survey finds investors have added risk, rotating into cyclical plays such as equities, Europe, industrials and banks, and out of defensive ones such as bonds, REITs, utilities and staples.
The average cash balance fell to 5.2% from 5.6%, still above the 10-year average of 4.6%. Investors' allocation to cash ticked down 2 percentage points to a net 41% overweight, also still above the long-term average.
The average allocation to global equities retraced almost all of last month's dip, rising 31 percentage points to a net 10% overweight.
Emerging markets remained the most favored region, with a net 23% of managers overweight. The U.S. and eurozone tie as the second most favored regions, both at a net 9% overweight.
Thirty-six percent of respondents put a trade war at the top of their list of concerns, followed by a monetary policy impotence (22%) and a slowdown in China (12%) as second and third on the list of biggest tail risk for managers.
"The dovish Fed and trade truce have caused investors to reduce cash and add risk, but their expectations of an earnings recession and debt deflation still dominate sentiment," said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, in a news release about the survey results. "The pain trade for the summer remains up in stocks and yields."
The survey of 207 money managers representing a total of $598 billion in assets under management was conducted July 5-11.