* Emerging markets tops crowded trade list
* "Long USD" is second, "Long FAANG & BAT" third
* Global equity allocations fall to lowest since 2016
* Cash overweight hits highest since 2009
* Allocations to European equities rise slightly (Writes through, adds details, quotes)By Helen Reid and Karin StroheckerLONDON, Feb 12 (Reuters) - Investors made a U-turn onemerging markets, naming them the most crowded trade, in Bank ofAmerica Merrill Lynch's survey for the first time in itshistory.This marked a big reversal from last month, when fundmanagers 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 soonafterwards.
Previous "most crowded" trades have included Bitcoin, andthe U.S. FAANG tech stocks, which led the selloff in December. Emerging-market stocks are up 7.8 percent so farthis year, and flow data on Friday showed investors pumpedrecord amounts of money into emerging stocks and bonds. Emerging-market assets had a torrid 2018. Crises in Turkeyand Argentina ripped through developing countries alreadysuffering from a strong dollar and rising U.S. yields pushing upborrowing costs.
But a dovish turn by the Fed at the start of the year,indicating the world's top central bank would not raise interestrates as quickly as previously expected, sparked freshenthusiasm among investors.Major asset managers and investment banks such as JPMorgan,Citi and BlueBay Asset Management ramped up their exposure toemerging 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.Analysing flows of its own clients, investment bank Citi notedthey had turned cautious on emerging-market assets over the lastweek, with both real money and leveraged investors pulling outfunds following four weeks of inflows. BAML did not specify whether the "long EM" crowded tradereferred to bonds, equities or both.Outside emerging markets, investors' main concern remainedthe possibility of a global trade war. It topped the list ofbiggest tail risks for the ninth straight month, followed by aslowdown in China, the world's second-largest economy, and acorporate credit crunch.Overall, BAML's February survey - conducted between Feb. 1and 7, with 218 panelists managing $625 billion in total -showed investor sentiment had hardly improved. Global equityallocations fell to their lowest levels since September, 2016."Despite the recent rally, investor sentiment remainsbearish," said Michael Hartnett, chief investment strategist atBAML.
SECULAR STAGNATIONInvestors remained worried about the global economy, with 55percent of those surveyed bearish on both the growth andinflation outlook for the next year.
"Secular stagnation is the consensus view," BAML strategistswrote.
Following this theme, investors were most positive on cashand, within equities, preferred high-dividend-yielding sectorslike pharmaceuticals, consumer discretionary, and real estateinvestment trusts.
As investors added to their cash allocations, the number offund managers overweight cash hit its highest level sinceJanuary, 2009.The least preferred sectors were those sensitive to thecycle, like energy and industrials - which BAML strategists seeas good contrarian investments if "green shoots" appear in theglobal economy.Worries about corporate debt were still running high, withthis month's survey showing a new high in the number ofinvestors demanding companies reduce leverage.
Some 46 percent of fund managers find corporate balancesheets to be over-leveraged, the survey found, and 51 percent ofinvestors want companies to use cash flow to improve theirbalance sheets. That's the highest percentage since July 2009.Europe, one of investors' least-favoured regions, showed aslight improvement. A net 5 percent reported being overweighteuro zone stocks, from 11 percent underweight last month.
But investors' reported intention to own European stocks inthe next year dropped to six-year lows as the profit outlook forthe region continued to lag.Allocations to UK stocks increased slightly from last monthbut the UK remained investors' "consensus underweight", BAMLsaid. It has been so since February 2016.<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^Evolution of FMS "most-crowded trade ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Josephine Mason, Helen Reid, and KarinStrohecker, editing by Ed Osmond, Larry King)
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