LONDON Investors were their most bullish on equities and commodities in nearly 10 years this month as optimism about growth surged, while inflation concerns led them to drastically sell down emerging stocks, a survey showed on Tuesday.
The monthly global fund managers' survey from Bank of America-Merrill Lynch showed a net 67 percent of respondents were overweight equities in February, compared with 55 percent in January.
This month's reading means the difference between overweights and underweights is 67 percentage points -- a level seen for the first time since the poll started in April 2001.
The poll, which surveyed 188 participants who manage total assets of $569 billion, also showed a collapse in emerging markets allocations. A net 5 percent of respondents are overweight here -- the lowest since March 2009 -- compared with 43 percent in January and an average reading of 27 percent.
Inflation expectations hit a 6-year high, with a net 75 percent of respondents expecting higher inflation in the next 12 months.
"It's one of the most bullish surveys we've had in a long time. Basically the story is growth expectations keep going on higher... What we're seeing is fairly extreme asset allocation decisions," said Patrick Schowitz, equity strategist at BofA Merrill Lynch.
"Despite really high risk appetite, investors have sold out of emerging markets... There is a concern about inflation in emerging markets and what it means for interest rates and tightening."
Bond underweight positions rose to a net 66 percent, levels not seen since April 2006, compared with 54 percent last month.
Commodities are the second most favored asset class after stocks, with a record net 28 percent of investors being overweight from 16 percent last month.
Cash underweight positions moved to a net 9 percent, levels not seen since January 2002, from 5 percent in January.
Average cash holdings fell to 3.5 percent from 3.7 percent, a level that triggers an equity sell signal on BofA's model.
Investors sold stocks in the following weeks five out of seven times when cash holdings were at this level in the past.
"Warning lamps are really flashing. But we've seen a ...shift out of fixed income and into equities. You would expect some extreme asset allocation into risky assets while that shift is going on," Schowitz said.
The poll was taken between February 4-10, when world stocks, measured by MSCI, hit their highest level in nearly 30 months.
SHIFT OUT OF EMERGING
Commodity price inflation has replaced euro zone sovereign debt funding as the biggest tail risk for respondents this month.
While overall emerging market allocation suffered its biggest decline in the survey's history, the Europe, Middle East and Africa (EMEA) region was popular. Investors were underweight in Asia and Latin America, where central banks are fighting to contain ballooning prices.
Within the EMEA region Russia was the most popular, thanks to high oil prices, while Turkey came second.
Away from emerging markets, investors have moved into the developed world. They are now a net 34 percent overweight in the United States, the highest reading since November 2008.
"Better data has revived optimism in the U.S. Emerging markets are one to two years ahead in the cycle. It's not really the best place to be in," Schowitz said.
A net 11 percent of fund managers are now overweight Europe, compared with a net 9 percent underweight last month.
The survey mirrors findings from the Reuters asset allocation poll, released at the end of January, which showed investors shifted equity holdings from emerging markets into the United States.
Hedge funds were also becoming bullish, raising their gearing levels. The ratio of gross assets held by hedge funds relative to their capital rose to 1.49, their highest since March 2008, from 1.26 last month.
Their net exposure to equity markets -- measured as long minus short as a percentage of capital -- rose to 39 percent, the highest since July 2007, from 31 percent in January.
(Editing by John Stonestreet)