BofA Merrill Lynch September Fund Manager Survey finds global risk appetite has room to grow

• The share of investors taking out protection against a correction in equity markets saw the largest monthly increase in 14 months
• Optimism over global growth continues to sag with just 25% of investors expecting a stronger economy in the next 12 months, as compared to 62% at the beginning of the year.
• Over half of investors surveyed (54%) cite volatility as the most undervalued asset, followed by sterling (15%) and oil (10%)
• Long Bitcoin is now considered the most crowded trade, at 26%; long Nasdaq falls to the second spot (22%), followed by short USD (21%)
• Net 23% of investors think the USD is undervalued, the highest level since December 2014, while net 81% of investors say the bond market is overvalued, the highest level in almost a year
• Investors point to geopolitical risk, with 34% of those surveyed indicating the biggest tail risk to markets is North Korea; policy mistake by the Fed/ECB (21%) and Chinese credit tightening (15%) round out the top three
• Net 54% of investors surveyed would be most surprised to see a recession in the next 6 months; net 30% would find an equity bubble to be the least surprising event
• Allocation to U.S. stocks falls to net 28% underweight; the last time the underweight in U.S. equities was larger was in November 2007
• Allocation to Emerging Markets equities rises to net 47% overweight; investors have not been this underweight the U.S. relative to EM since December 2007

“Cash levels remain elevated, suggesting markets can remain in an Icarus upside mode for risk assets,” said Michael Hartnett, chief investment strategist. “Investors have shunned mean reversion and cut their expectations for much higher bond yields.”

Ronan Carr, European equity strategist, added that, “overall sentiment on the Eurozone is becoming less euphoric, with headwinds from a strong Euro and investors’ EPS expectations showing less momentum.”