(Bloomberg) -- When it comes to growth, inflation, and profits, fund managers are striking a bullish note on the global investment climate.
Expectations for global growth and inflation are at five-year highs, optimism about the outlook for corporate profits is at six-year highs, and only 6 percent of investors forecast lower bond yields next year, according to Bank of America Merrill Lynch's monthly survey of money managers, which solicits the views of investors with $473 billion in total assets under management.
Their optimism mirrors rising earnings expectations and surging global stock prices in the wake of Donald Trump's election victory, which has fed hopes of corporate tax cuts, an uptick in U.S. growth, and a softer regulatory climate.
Investors are putting money where their mouth is, too. Cash balances fell to 4.8 percent in December from 5.0 percent in November. That marks a notable shift from the 5.8 percent level posted in October, a surge that had not been seen since the aftermath of the Brexit vote.
But bullish sentiment belies one big risk for bond and equity markets alike: Over one-third of surveyed participants reckon long U.S. dollar positions are now the world's most crowded trade, with the percentage of participants who think the currency is overvalued at its third-highest level in a decade.
Investor wariness about the dollar is in sharp contrast to sell-side analysts from Morgan Stanley to Goldman Sachs Group Inc. who have bullish outlooks for the greenback next year.
Here are some of the highlights of the monthly survey conducted Dec. 2-8.
- Expectations of global growth jumped to 19-month highs, from a net 35 percent in November to 57 percent, reflecting the broad-based improvement in manufacturing and consumer data in recent weeks from the U.S. to Europe to Asia.
- 84 percent of respondents have an optimistic outlook for global inflation, its second-highest level in over 12 years.
- Allocation to banking stocks has risen to record highs, with a net 31 percent of investors overweight compared with 25 percent the previous month.
- Underscoring the disconnect between fund-manager optimism over the economic outlook and meager capital spending, a record number of participants (74 percent) think companies are under-investing.
- Meanwhile, allocation to U.S. equities has risen to a two-year high, with a net 15 percent of investors overweight in the sector from 4 percent the previous month.
Bullish sentiment naturally raises the risk that corporate earnings will fail to match rising expectations or economic data will disappoint given the amount of good news already priced in the market. The latter risk is cited by some analysts as the reason why 2017 could be a year of two halves, as macro headwinds kick in.