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Bank of America Merrill Lynch logo is displayed at its office in Hong Kong on Mar. 8, 2013.

Bobby Yip/Reuters

Investors made a U-turn on emerging markets, naming them the most crowded trade, in Bank of America Merrill Lynch’s survey for the first time in its history.

This marked a big reversal from last month, when fund managers said “short EM” was the third most-crowded trade – showing how fast the mood can shift in an uncertain market.

It could prove to be a bad omen for emerging markets, though, as assets named “most crowded” usually sink soon afterwards.

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Previous “most crowded” trades have included Bitcoin, and the U.S. FAANG tech stocks, which led the sell-off in December.

Emerging-market stocks are up 7.8 per cent so far this year, and flow data on Friday showed investors pumped record amounts of money into emerging stocks and bonds.

Emerging-market assets had a torrid 2018. Crises in Turkey and Argentina ripped through developing countries already suffering from a strong dollar and rising U.S. yields pushing up borrowing costs.

But a dovish turn by the Fed at the start of the year, indicating the world’s top central bank would not raise interest rates as quickly as previously expected, sparked fresh enthusiasm among investors.

Major asset managers and investment banks such as JPMorgan, Citi and BlueBay Asset Management increased their exposure to emerging markets in recent weeks.

The Institute of International Finance (IIF) predicted a “wall of money” was set to flood into emerging market assets.

However, there are some indications momentum may be waning. Analyzing flows of its own clients, investment bank Citi noted they had turned cautious on emerging-market assets over the last week, with both real money and leveraged investors pulling out funds following four weeks of inflows.

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BAML did not specify whether the “long EM” crowded trade referred to bonds, equities or both.

Outside emerging markets, investors’ main concern remained the possibility of a global trade war. It topped the list of biggest tail risks for the ninth straight month, followed by a slowdown in China, the world’s second-largest economy, and a corporate credit crunch.

Overall, BAML’s February survey - conducted between Feb. 1 and 7, with 218 panelists managing US$625-billion in total - showed investor sentiment had hardly improved. Global equity allocations fell to their lowest levels since September, 2016.

“Despite the recent rally, investor sentiment remains bearish,” said Michael Hartnett, chief investment strategist at BAML.

SECULAR STAGNATION

Investors remained worried about the global economy, with 55 percent of those surveyed bearish on both the growth and inflation outlook for the next year.

“Secular stagnation is the consensus view,” BAML strategists wrote.

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Following this theme, investors were most positive on cash and, within equities, preferred high-dividend-yielding sectors like pharmaceuticals, consumer discretionary and real estate investment trusts.

As investors added to their cash allocations, the number of fund managers overweight cash hit its highest level since January, 2009.

The least preferred sectors were those sensitive to the cycle, like energy and industrials – which BAML strategists see as good contrarian investments if “green shoots” appear in the global economy.

Worries about corporate debt were still running high, with this month’s survey showing a new high in the number of investors demanding companies reduce leverage.

Some 46 per cent of fund managers find corporate balance sheets to be over-leveraged, the survey found, and 51 per cent of investors want companies to use cash flow to improve their balance sheets. That’s the highest percentage since July, 2009.

Europe, one of investors’ least-favoured regions, showed a slight improvement. A net 5 percent reported being overweight euro zone stocks, from 11 per cent underweight last month.

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But investors’ reported intention to own European stocks in the next year dropped to six-year lows as the profit outlook for the region continued to lag.

Allocations to British stocks increased slightly from last month but the UK remained investors’ “consensus underweight”, BAML said. It has been so since February, 2016.

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