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Global investors have the most pessimistic outlook on the world economy since the 2008 financial crisis, according to Merrill Lynch’s monthly survey, which also showed a sharp fall in U.S. equity allocations.

The survey, released on Tuesday, was conducted Oct. 5 to 11 and canvassed investors managing US$646-billion. It showed investors remained overweight equities overall, though the 22-per-cent overweight was just marginally off the recent record low of 19 per cent.

But in a sign of caution, they held cash at 5.1 per cent – a net 36-per-cent overweight – and well above than the 4.5-per-cent 10-year average.

The poll showed that a net 38 per cent of respondents expected the global economy to slow, the worst outlook on global growth since November, 2008. A net 35 per cent of participants identified trade war as the biggest risk.

Investors were also gloomy on corporate earnings, with a fifth of respondents expecting global profits to deteriorate in the coming year, Merrill Lynch said, observing that in January a net 39 per cent of investors had predicted an improvement.

Focusing investors’ minds is on the rise in U.S. Treasury yields – 10-year yields hit seven-year highs recently – amid expectations of more policy tightening and signs the U.S. economy and company earnings could slow from the sugar rush provided by tax cuts.

All those fears were among factors that triggered a sudden sell-off on Wall Street last week, putting the S&P 500 on track for its biggest monthly loss since mid-2015.

There are also concerns about the overwhelming popularity of big tech, with the Merrill Lynch poll showing U.S. and Chinese tech stocks remained the “most crowded” trade for the ninth consecutive month.

The poll showed a dramatic 17-percentage-point drop in U.S. equity allocations to a net 4-per-cent overweight, with Japan ousting the United States as investors’ most favored market with an 18-per-cent overweight.

The decline in European equity holdings also continued, falling six percentage points in October to the lowest since December, 2016.

Investors remain reluctant to give up on higher-risk assets however, holding on to an overall underweight position on bonds.

“Investors are bearish on global growth but not bearish enough to signal anything but a short-term bounce in risk assets,” Merrill Lynch chief investment strategist Michael Hartnett said.

The poll found also that the yield level at which investors would rotate from equities to bonds was seen at 3.7 per cent on 10-year U.S. Treasuries – the highest since March when the question was first asked.

Yields are currently around 3.17 per cent, almost 10 bps off recent highs.

In an interesting turnaround, a net 51 per cent of poll participants named the dollar as overvalued, “notably against emerging market currencies which are seen as never having been more undervalued in survey history,” Merrill Lynch said.

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