High quality stocks, US/EU credit, EM debt are most crowded trades

The latest survey of global fund managers by Merrill Lynch continues to reveal high levels of cash in asset allocation, neutral stance on equities (1% net overweight vs 9% a month ago), yet on the backdrop of positive sentiment towards economic and profit growth…

Interestingly, most investors explain that high cash levels in allocation (net 5.4%) reflect « bearish views on markets »…

Source: Bank of America Merrill Lynch

Source: Bank of America Merrill Lynch

Another interesting indicator in the survey is about the « most crowded trades » based on investors’ views.

From Merrill’s note:

« Most crowded trades are all « NIRP-winners »: long High Quality stocks; long US/EU Corporate bonds; long EM debt. Sept FMS shows first meaningful reduction in bond proxy exposure (staples, utilities, telcos – Exhibit 1), as well as reduction in « high growth » US market. But both REITs & tech remain big stubborn longs, and EM equity OW highest in 3.5 years. All vulnerable should Fed and especially BoJ fail to reduce bond vol in Sept. »

When you think about the increasing interest in EM debt, or the sustaining impact of QE on « low vol », « bond proxies », « high visibility/quality » stocks, you get a sense markets are probably ripe for a correction…

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