Fears of a bond-market crash, a breakdown in globalization, a new crisis in the euro area?

There were a bevy of reasons for fund managers to push their cash balances to 5.8 percent of their portfolios in October, up from 5.5 percent last month, matching levels not seen since the aftermath of the Brexit vote. The share of cash hasn’t been higher than that since November 2001, shortly after the terrorist attacks in the U.S.

The amount of dry powder in portfolios is above that seen during both Europe’s sovereign-debt crisis and the U.S. debt-ceiling debacle, according to Bank of America Merrill Lynch’s monthly survey of money managers.

a1

“This month’s cash levels indicate that investors are bearish, with fears of an EU breakup, a bond crash and Republicans winning the White House jangling nerves,” said Michael Hartnett, the bank’s chief investment strategist.

There are no shortage of risks on the investor horizon, according to market participants surveyed, with 18 percent fearful of a disorderly adjustment in the bond market.

a2

The monthly survey solicits the views of investors with more than half a trillion dollars in cumulative assets under management.

Over the past year and a half, Hartnett has advised investors to hold more cash in their portfolios or be outright long paper money on multiple occasions.

 In mid-September, a Goldman Sachs Group Inc. team led by Managing Director Christian Mueller-Glissman downgraded bonds on a three-month basis while also retaining an overweight position on cash.

Elevated cash balances potentially sets the stage for a stock-market rally, according to the Bank of America analysts.  “When average cash balance rises above 4.5 percent a contrarian buy signal is generated for equities. When the cash balance falls below 3.5 percent a contrarian sell signal is generated,” writes Hartnett’s team in Tuesday’s report.

a3

In the three months following 9/11 and the Brexit referendum, the S&P 500 rose by 4.1 and 2.4 percent, respectively.

Merrill Lynch suggests greater clarity on U.S. and euro-area political developments, signs of corporate-earnings momentum and confidence that bond-market repricing will happen in an orderly manner would buoy global stock markets.

The survey also highlights that inflation expectations are at a 16-month high, while stagflation fears have reached their highest level since April 2013, with the latter perhaps, in part, driven by events in the U.K.

Article and media originally posted by Sid Verma and Luke Kawa at bloomberg.com