LONDON, Nov 16 (Reuters) - Global investors chopped cash holdings as inflation expectations soared in the wake of Republican Donald Trump’s surprise U.S. presidential election victory, a Bank of America Merrill Lynch survey showed.
The monthly survey of 177 clients with $456 billion of assets under management was conducted between Nov. 9 and 14 - after the results of the U.S. elections were known.
Inflation expectations had soared to the highest level in 12 years while global growth and profit expectations rose to one-year highs, according to the survey released on Wednesday.
“(The) U.S. election result (is) seen as unambiguously positive for nominal GDP,” BAML’s chief investment strategist Michael Hartnett wrote in the survey.
Cash levels slumped to 5 percent in November from 5.8 percent in October, the largest month-on-month drop since August 2009. Hartnett pointed out that a drop to below 4.8 percent in December - or a fall of more than 1 percentage point over two months - could spark a sell-off in riskier assets.
“(The) election accelerates rotation into banks, out of high dividend yield and bond proxies (e.g. utilities, telcos), and catalyzes buying of U.S. equities, selling of tech and emerging markets,” the survey found.
The latter suffered the biggest monthly drop in allocations since February 2011, the survey found.
The survey also showed a growing conviction for inflation trades, with a majority of investors expecting the cyclical rotation to continue “well into 2017”.
U.S. President-elect Trump’s plans to cut taxes and boost infrastructure spending is expected to boost economic activity while his proposals to deport illegal immigrants and impose tariffs on cheap imports are seen driving inflation higher.
Sharp gains in U.S. bond yields in recent days have drawn investors to the dollar, and the dollar index is hovering just below its highest level in more than 13-1/2 years.
Yet BAML found that fears of stagflation, or low growth coupled with high inflation, had also risen close to four-year highs.
Looking ahead, survey participants identified protectionism as the biggest threat to market stability. BAML also found that the allocation to emerging market equities had fallen sharply to a net 4 percent overweight from 31 percent in October.
Past emerging markets growth has been linked to global trade and Trump’s pledge on the campaign trail to review major trade deals, tapping into a growing public sentiment against globalization, has sparked concern among investors.
Emerging equities and bonds had been among this year’s top performers until the U.S. elections.
BAML also said exposure to Japanese equities slipped to net 5 percent underweight from 3 percent last month. (Reporting by Karin Strohecker; Editing by Catherine Evans)