Emerging markets most crowded trade for first time in BAML survey history

By Helen Reid

LONDON (Reuters) - Investors said emerging markets are the most crowded trade in Bank of America Merrill Lynch's survey for the first time in its history, the bank said on Tuesday.

Investors have piled into emerging market assets this year as the U.S. Federal Reserve signalled a pause in rate hikes, reducing pressure on the asset class, and investors worried about rising corporate debt, falling inflation and weaker global economic growth.

BAML did not specify whether the trade referred to bonds, equities or both.

Meanwhile investors' main concern remained the possibility of a global trade war, which topped the list of biggest tail risks for the ninth straight month, followed by a slowdown in China, the world's No. 2 economy, and a corporate credit crunch.

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

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.

Following this theme, investors are most positive on cash and, within equities, prefer 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 percent of fund managers find corporate balance sheets to be overleveraged, the closely-watched survey found.

In Europe, one of investors' least-favoured regions, there was a slight improvement with a net 5 percent reporting being overweight euro zone stocks, from 11 percent underweight last month.

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 UK stocks increased slightly from last month but the UK remained investors' "consensus underweight", BAML said. It has been so since February, 2016.

(Reporting by Josephine Mason and Helen Reid, Editing by Ed Osmond)