BofA Merrill Lynch May Fund Manager Survey finds investors are bullish; macro expectations of high growth and low inflation at record high

• Investors’ macro expectations find global economy to be just right, with a record high 34% citing a Goldilocks scenario of high growth and low inflation
• China replaces European disintegration as the most commonly cited tail risk for the first time since January 2016, with 31% of global fund managers citing Chinese credit tightening as the biggest risk in the market
• Long Nasdaq is seen as the most crowded trade for the first time, knocking long U.S. dollar off the top spot after five months; despite this, net 23% of investors still say the USD is overvalued
• Profit expectations are at a three-year high as net 56% of respondents say global profits will improve over the next 12 months
• FMS cash levels remain unchanged from April at 4.9%, still above the 10-year average of 4.5%
• Investors’ views on valuation continue to vary by region: net 82% of fund managers think the U.S. is the most overvalued region, near April’s all-time high; meanwhile, Eurozone and EM equities are seen as undervalued, at net 20% and net 44% respectively
• Net 59% of investors are overweight Eurozone equities, up from net 48% overweight in April and the highest allocation since March 2015
• Allocation to UK equities rises to a net 27% underweight versus net 34% underweight last month
• Japan equity allocation fell for the second month to a net 12% overweight as investors increase their allocation into European equities

“Investor sentiment is bullish,” said Michael Hartnett, chief investment strategist. “But irrationality is not yet visible despite all-time highs in credit and equity markets, robust global EPS and a benign French election result.” Ronan Carr, European equity strategist, added that, “Allocation to Eurozone equities is at its third highest level on record. The recent outperformance seems due for a pause, especially versus the U.S.”

Commenting on the Japanese market, Shusuke Yamada, chief Japan FX/equity strategist said, “Although global investors’ allocation to Japanese equities declined for a second month; easing risk factors, better currency levels, and fundamentals hint of a possible summer rally.”