Global fund managers are keeping equity holdings at the lowest levels in two-and-a-half years, according to Bank of America Merrill Lynch's benchmark survey published Tuesday, even as they continue to bet on slower rate hikes from the Fed and moderately faster inflation.

Fund managers have trimmed cash allocations by around 0.2 percentage points to 4.6% this month, the March  BAML survey of 186 investors controlling around $664 billion in assets revealed, indicating improving sentiment from last month's decade low. However, global equity allocations fell to a net 3% overnight, the lowest since September 2016, with only a net 30% of hedge funds indicating a long position in stocks, the lowest since December 2016.

"The pain trade for stocks is still up," said BAML's chief investment strategiest Michael Hartnett. "Despite rising profit expectations, lower rate expectations and falling cash levels, stock allocations continue to drop. There is simply no greed to sell in equities."

Growth and inflation expectations have improved, however, with a net 25% expecting the global economy to weaken over the next year, down from 47% last month, and a net 34% seeing faster inflation.

That said, around 38% of respondents think the Fed's rate hike cycle is over, and 50% think the U.S. dollar, which has fallen 1.3% from its one-year high earlier this month as Fed rate hike bets fade, is overvalued, the highest level in sixteen years.

A slowdown in China (30%), where growth is forecast at the weakest levels since 1990, has replaced trade war concerns (19%) as the markets biggest tail risk for the first time in nine months, while a corporate credit crunch (10%) continues to sit in third place.

"Short European equities (19%) is cited as the most crowded trade for the first time in survey history, replacing Long emerging markets," the survey said, with long U.S. dollar trades (18%) and "long FAANG+BAT" (16%) coming in third.

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