Asset managers are still holding high levels of cash. This is one of the findings of the most recent global fund manager fund survey carried out by Bank of America Merrill Lynch (BofAML) and bearing the witty headline Profits of Doom.

Another is that a record high number of investors surveyed are forecasting a Goldilocks investment landscape. BofAML defines the Goldilocks scenario as one that boasts above-trend growth and below-trend inflation.

The second finding is particularly striking. The survey suggests that fund managers are taking a risk-on attitude to investing even though a record number say they believe that stocks are overvalued. BoAML speaks of an ominous inflection point in profit expectations.

Cash stubbornly high

It says that cash remained unchanged at a stubbornly high 4.9% in the first full week of August during which the survey was carried out. Asset allocation to cash rose to its highest level for nine months.

BofAML takes the opportunity to remind readers of just how its fund manager survey cash rule works. When an average cash balance rises above 4.5%, a contrarian buy signal is generated for equities. When cash falls below 3.5% a contrarian sell signal is generated.

BofAML says its Global FMS Macro Indicator is currently in neutral territory, as FMS Macro conditions have peaked in recent months. This is based on a series of metrics including year-on-year change in inflation expectations, capex demand and risk appetite.

A buy signal is a rising macro indicator and rising cash level over the past two months. A sell signal is a falling indicator and cash down at least 50 basis points over two months.

Recession would be biggest surprise

Recession would be the biggest surprise for fund manager survey investors in the next six months. It was identified as such by some 53% of respondents, followed by inflation (25%). The investors say that the least surprising event would be an equity bubble (34%).

A policy mistake by the US Federal Reserve Bank or by the European Central Bank is identified by survey participants as the biggest tail risk. Second on that short list is a bond crash. Third comes North Korea.

Investors believe that the low level of inflation is

• Structural (43%)
• Cyclical (35%)
• Temporary (21%)

Anglo-Saxon attitudes

Political angst in the Anglo-Saxon part of the world is reflected in asset allocation. Allocation to US stocks stands at its lowest level since January 2008. UK stocks are at the lowest level since November of that year. Emerging markets and the eurozone are in favour.

The top industry sector overweight is banks for the second month in succession. Allocation to banks is at a record high, says BofAML. Banks are followed by technology, even though as contrarian investors point out the allocation to tech fell to its lowest level for three years.

BofAML highlights as contrarian trades

• Long utilities versus banks
• Long energy versus industrials
• Long materials versus technology
• Long UK versus the eurozone

Allocation, allocation, allocation

Putting some flesh on the bones, allocation to industrials rose to net 13% overweight (from net 8% overweight last month). Allocation to utilities rose to a net 27% underweight position from the 29% underweight metric seen in July.

Allocation to energy fell to net 9% underweight from net 7% underweight last month, a 14-month low. The average allocation to telecoms, consumer staples and utilities was 18% underweight in August. This is an increase from 26% underweight in December 2016.

Allocation to technology fell to net 24% overweight (from net 28% overweight last month). As mentioned earlier, this represents a three-year low. Allocation to banks rose to net 32% overweight (from 29% last month), a record high as already indicated.

Net % saying the most surprising would be

• A recession (49%)
• An equity bear market (-6%)
• Inflation (-8%)
• An equity bubble (-28%)

Survey details

The survey was carried out in the period 4-10 August. An overall total of 202 panellists with US$587bn of assets under management participated. Of these, 174 participants responded to the global questions; 91 participants responded to the regional questions.