Receding concerns about a recession have sparked a surge in allocations to equities among international investors, according to the well-regarded Bank of America Merrill Lynch Global Fund Manager Survey.
The latest issue of the monthly survey – which had 199 participants with $627bn in assets under management take part between 6-12 December – saw cash holdings drop to their lowest since March 2013.
Cash levels moved to 4.2 per cent and remains in neutral territory for the time being, with allocation levels at their lowest since November 2015.
There was a 10-percentage point monthly increase in the proportion of fund managers who said they were now overweight equities, up to 31 per cent.
Furthermore, bond allocations fell to a 13-month low to a 48 per cent net underweight – their lowest level since November 2018.
This has been fuelled by changing sentiment around the global growth outlook, as a net 68 per cent of asset allocators believe a recession within the next 12 months is now unlikely.
There has also been an improvement in global growth expectations with a net 29 per cent expecting economic expansion next year compared, just five months since the bank recorded the most bearish fund manager survey results since the global financial crisis.
In addition, just 28 per cent of respondents have taken out protection against a sharp fall in equity market during the next three months, compared with 62 per cent who said they have not.
Fund managers have become more bullish on the profit outlook with global profits likely to accelerate within the next 12 months, the first time since August 2018.
There are risks to the outlook with the trade war continuing to top the list of biggest tail risks concerns, with 33 per cent of respondents highlighting it as a concern.
New tail risks have emerged in the latest edition of the survey, however, with international fund managers highlighting the outcome of the 2020 presidential election (22 per cent) and the popping of the ‘bond bubble’ (19 per cent). A more familiar worry – monetary policy impotence – was also highlighted by 12 per cent of asset allocators.
Concerns over the credit cycle remain as 39 per cent of managers claim that corporate balance sheets remain overleveraged, although slightly more prefer that companies increase capital expenditure than improve balance sheets.
There were some changes on a geographic level as investors rotated into higher beta regions, the bank noted.
As such, allocations to US equities dropped by 5 percentage points from November to an 8 per cent overweight position.
Emerging market equities remains the consensus overweight position having moved eight percentage points higher to a 25 per cent overweight, while in Europe allocations moved 11 percentage points higher to a 24 per cent overweight – its highest level since May 2018. There was also a 5 percentage point rise in Japanese equity allocations to a 6 per cent overweight.
One of the biggest reversals in sentiment was seen in UK equities, however, as allocations jumped by 8 percentage points to a 13 per cent underweight.
This came ahead of the UK general election result which saw the Conservative party return with a strong majority and the Labour party slump to its worst defeat since 1935.
The average UK allocation between 1999 and 2016 was a 10 per cent underweight, but since the Brexit referendum of June 2016 it has swung out to 28 per cent.
The bank noted that investors have been closing their structural underweight to the country during the past two months in anticipation of a majority Conservative government.
On a sectoral basis, asset allocators have taken a barbell approach with exposure to cyclical growth sectors and higher quality value stocks.
Technology and healthcare remain the most overweighted sectors, while utilities, materials and energy are the most underweighted parts of the market by fund manager survey respondents.