For all the uncertainty the new Trump administration has brought financial markets, fund managers are experiencing a surge of optimism, according to Bank of America Merrill Lynch's latest survey.
A higher US dollar is the most crowded trade, while investors are closely watching European equities, according to the survey.
The bank's February report, covering 175 fund managers with $632 billion under management, found that businesses in the US are more optimistic than at any stage since the survey began tracking fund managers in 2003.
A total of 23 per cent of the managers who participated in the survey believe the global economy is headed for a growth "boom" (above trend growth and inflation), while 18 per cent point to a "goldilocks" scenario, where growth is above trend but inflation is still lagging below. And while 43 per cent still expect secular stagnation, this is down sharply from 88 per cent 12 months ago.
"Investor allocation and positioning continue to reflect expectations of a higher US dollar. A more hawkish stance by Janet Yellen at this week's Humphrey Hawkins testimony could provide an upside catalyst for the dollar, given the dovish market pricing of rate hikes," said Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch.
Long US dollar trades are by far the most popular, with 41 per cent saying the trade is the most crowded. A total of 14 per cent point to short government bonds and 13 per cent believe long US/EU corporate bonds are most crowded, while allocation to Eurozone equities has surged to an eight-month high.
Eighty-one per cent of respondents expect a pick-up in inflation, expectations that may be the signal the US Federal Reserve needs to resume raising interest rates, with the market currently pricing in a 34 per cent chance of a hike next month, up from about 30 per cent before Dr Yellen spoke.
Risky business
Geopolitical uncertainty, concerns over persistent deflationary pressures and languishing growth had investors in 2016 hoarding record amounts of cash, but signals that the global economy is picking up prompted fund managers to lessen their cash positions.
While cash holdings are still above the 10-year average of 4.5 per cent, this month levels dropped from 5.1 per cent to 4.9 per cent.
President Trump's recent protectionist commentary on trade policy, particularly with the world's second largest economy China, has perplexed markets, and as such 34 per cent of fund managers suggest gold as the best performing investment in a protectionist world.
While there is cautious optimism throughout the surveyed fund managers, 32 per cent see a trade war as the biggest tail risk facing markets, while 36 per cent point to the upcoming European elections raising Eurozone disintegration risk.
As equity markets roar to eight-year highs, Bank of America Merrill Lynch found 34 per cent of respondents see President Trump's protectionist policies as the most likely bear market catalyst.
Higher interest rates are also likely to curb equities enthusiasm, followed by an ambiguous "financial event".
And while global optimism takes hold of investors, 53 per cent hope companies increase capex spending, while 20 per cent want companies to shore up their balance sheets.
And while corporates have continued to sweet-talk investors with share buybacks and lofty dividend payments, only 15 per cent of those surveyed hope this continues, the lowest reading since June 2009.