Here's the measure that says equities are a contrarian buy

Fund managers are becoming less confident about corporate profit growth and continue to carry more cash than normal, driven partly by a bearish view on equity markets. That managers are more underweight US stocks than at any time since 2008 is among the numerous startling facts revealed in Bank of America Merrill Lynch's (BAML) monthly funds survey.

Global markets have powered ahead in 2017, and expectations have been for Wall Street to keep growing earnings fast. But optimism appears to have been dampened in recent months.

Now, fund manager expectations that profits will improve fell to a net 41%, the lowest level since Donald Trump won the US election in November. A net 22% don't expect any substantial improvement in profits over the next 12 months.

Allocation to US equities fell to a net 20% underweight in July - the biggest underweight since January 2008 - with long NASDAQ viewed as the most crowded trade for the third month running.

What's more, a net 17% believe corporate balance sheets are overleveraged. That's the highest number since April 2009.

Pessimism around markets - 25% of managers surveyed are bearish - partly explains why the average cash balance was 1 percentage point lower in July month-on-month but, at 4.9%. A fifth prefer cash over low-yielding equivalents, and 6% need it for margin requirements.

Not as bad as it sounds

It all sounds a bit grim. However, that cash is still well above the 10-year average of 4.5% is, according to BoAML, a contrarian buy signal for equities. "Cash too high for 'big top'," say its analysts.

But where's the money going? The big 'longs' this month are banks, eurozone and emerging markets. The 'shorts' are UK, energy and US stocks - allocation to UK equities grew to a net 30% underweight from 23% last month.

Over two-thirds of respondents believe US and global technology stocks are "expensive", after a long bull run that has been the driving force in markets, and 12% believe valuations are "bubble like".

Alongside tech, investors have also been selling discretionary and industrials, while buying into Japan, healthcare, materials and commodities.

Banks are now the number one sector overweight - tech had been top 80% of the time since the 2009 market lows - with allocation to global banks at a net 29% overweight from 23% last month.

Meanwhile, Japan saw a major jump in sentiment, moving to a net 18% overweight, from just 1% last month.

Fear the Fed

More investors that at any time since April 2011 say global monetary policy is "too stimulative", while the biggest potential tail risks are seen as a crash in global bond markets and a policy mistake by the Federal Reserve or European Central Bank.

Of those fund managers surveyed, 42% think Fed balance sheet reduction in 2017 will be a non-event. A further 12% think it will be great news for equities, especially the banks. Elsewhere, 31% believe it's risk-off, sending yields up and stocks down.

Eric Lonergan, a multi asset fund manager at M&G Investments, questioned the prevailing view amongst investors that cash is a "safe asset".

"Cash at the moment in the UK is an asset with a close to guaranteed real loss because you're going to lose 2% inflation each year, which compound over 15 years means you're going to lose 30%-plus," he said.

"I love that we have a world where financial theory can teach someone that this asset is safe because you're guaranteed to lose money, whereas an asset [equity] with a very high probability of a positive return, but you don't know its nominal value from one day to the next is risky and that is a very odd view of risk."

That said, Lonergan, who co-manages M&G's Episode range of funds, admits the firm's basket of portfolios do hold "quite a lot of cash", as well as "aggressive equity" allocations.

In his defence, the high cash weighting gives his funds "the firepower to respond" if things "kick off" and investment opportunities pop up.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.