BofA-Merrill sees no signs of 'irrational exuberance' in latest fund manager survey

Stockmarket investors are set to continue flying close to the sun, but not close enough to singe their wings, strategists at Bank of America-Merrill Lynch said on the back of the results of the investment bank's latest monthly Fund Manager Survey.

To back up their reasoning, the strategists pointed to still high cash levels, at 4.8%, and the largest jump seen in "taking out protection" in 14 months.

That, they argued, pointed to no "irrational exhuberance yet".

Another reason why they believed markets could remain in 'Icarus' upside mode for risk assets was because investors had downgraded their expectations for government bond yields to head higher.

Last November, over 26% of managers expected bond yields would head "much higher", versus just 5% at present.

Acting as a backdrop, the September FMS revealed that managers had gone 'underweight' on US stocks relative to Emerging Markets and euro area shares by the most in 10 years, Merrill said, with the weak US dollar acting as a fulcrum.

Fund managers judged that the 'Greenback' was at its most 'undervalued' since December 2014, BofA Merrill said.

In terms of potential 'tail risks', North Korea was the biggest by some margin, which tallied up with a drop seen in exposure towards Japan.

The next largest tail risks were policy mistakes by the US Federal Reserve or European Central Bank.