Though investors remain conservative, optimism about the macro environment has rebounded to pre-Brexit levels, says BofA Merrill Lynch.

A bearish view on markets and a preference for cash over low-yielding equivalents have kept investors’ cash levels up in September, according to the BofA Merrill Lynch Fund Manager Survey.

Cash levels remained high at 5.5 per cent this month, up marginally from 5.4 per cent in August. Highlighting market uncertainties, equity allocation relative to cash allocation is the lowest it has been in four years, at levels which have historically been a good entry point to stocks. A record 54 per cent of investors polled believe equities and bonds are overvalued.

The low-rate backdrop is expected to continue for some time yet, with 83 per cent of investors believing the Bank of Japan and the European Central Bank will maintain negative rates over the next year. Global growth expectations, meanwhile, have continued to rise, with a net 26 per cent of investors predicting an improvement over the next 12 months.

Investors identified long high quality stocks as the most crowded trade, followed by long US/EU investment grade corporate bonds and long emerging market debt. All of these are dependent on long-lasting negative interest rate policy, the firm said.

Hedge fund exposure to stocks is at its highest level since May 2013, underscoring the market’s vulnerability to a bond shock, BofA Merrill Lynch said.

“Investors see an unambiguous vulnerability to ‘bond shock’ among risk assets, with the most crowded negative interest trades and EM equities susceptible should the Fed and especially the BoJ fail to reduce bond volatility in September,” said chief investment strategist Michael Hartnett.

With the US presidential elections fast approaching, allocation to US equities has dropped to net 7 per cent underweight in September from net 11 per cent overweight last month. 

Allocation to eurozone equities, recently rattled by Brexit shockwaves, improved modestly to net 5 per cent overweight from net 1 per cent overweight.

Allocation to emerging market equities is at its highest overweight in three and a half years – net 24 per cent overweight, up from net 13 per cent overweight in August. Allocation to Japanese equities, meanwhile, is down at net 8 per cent underweight, the biggest underweight since late 2012.

Manish Kabra, European equity quantitative strategist at Merrill Lynch, said: “European investors have increased cash allocations to cover their sector underweights in banks and commodity sectors. Macro optimism is firmly at pre-Brexit levels, with economic growth expectations at their strongest since June.”

A total of 208 panellists with $579 billion in assets under management took part in the survey.