US is most favorable region among fund managers, says BofA Merrill Lynch

The BofA Merrill Lynch August Fund Manager Survey finds the US is the most favorable region for the first time in five years, accompanied by record high investor sentiment around US profits.

Allocation to US equities rose 10 percentage points to 19 percent overweight, the biggest holding since January 2015 and the top equity region for the first time in five years.

When asked about their regional expectations for corporate profits, 67 percent of those surveyed found the US to be the most favorable region, a record 17-year high.

A trade war remains the tail risk most commonly cited by respondents (57 percent) for the third straight month, with the top three completed by quantitative tightening at 15 percent, and a China slowdown, 14 percent.

When asked about decoupling in the global economy respondents are split: 34 percent note they expect it to continue, while 32 percent see US growth decelerating and 28 percent think Asia and Europe will accelerate.

Long faang (Facebook, Apple, Amazon, Netflix and Google) plus bat (Baidu, Alibaba, Tencent) at 54 percent remains the most crowded trade identified by investors for the seventh straight month and the most crowded outright since Long US dollar in December 2015. The top three crowded trades in August are rounded out by short emerging market equity at 15 percent and short treasuries at 11 percent.

August shows survey participants are buying banks and continue to flock to perceived safe havens like US equities and cash. They are selling commodity sectors and defensive sectors and regions like materials, energy and UK equities.

Looking at sectors further, allocation to tech inches down 1 percentage point to 32 percent overweight, but still makes it the most favored sector. Allocation to healthcare slides 5 percentage points to 19 percent overweight, making it the third biggest overweight among survey participants.

Allocation to eurozone equities sees a small 5 percentage point increase this month to 17 percent overweight, ending six months of falling allocations.

Respondents suggest they believe the Fed tightening cycle will continue, with 54 percent underweight bonds versus 20 percent overweight global banks.

The allocation to UK equities sees the biggest one-month drop since May 2016, down 10 percentage points to 28 percent underweight, as concerns of a ‘no deal Brexit’ rise.

‘Rising corporate leverage concerns say bonds should outperform stocks, while a weaker profit outlook suggests defensives could outperform cyclicals,’ says Michael Hartnett, BofA Merrill Lynch chief investment strategist in a statement. ‘With investors telling us they are long the US, the Fed and cash, our view remains: peak profits, policy and returns.’

BofAML’s August Global Fund Manager Survey involved 243 companies with $735 bn in assets under management.