Global fund managers have trimmed their equity holdings to the lowest levels in two-and-a-half years, according to Bank of America Merrill Lynch's benchmark survey, favoring cash positions and defensive investments as more than half of those polled said they were bearish on both the growth and inflation outlook for the global economy next year.

Fund managers are piling into cash, taking allocations to the highest levels in a decade, the February BAML survey of 218 investors controlling around $625 billion in assets revealed, as a net 46% expect global GDP to weaken over the next twelve months and 55% see secular stagnation as the consensus forecast. Curiously, while a net 42% see global corporate profits deteriorating this year, that figure is up 10 percentage points from the previous month, despite the fact that S&P 500 profits are forecast to turn negative this quarter for the first time in three years.

Still, even with this year's U.S. equity market rally, which has lifted the S&P 500 8.1%, allocation to global equities fell 12 percentage points to a net overweight of just 6%, the lowest since September 2016.

"Despite the recent rally, investor sentiment remains bearish," said BAML's chief investment strategist Michael Hartnett. "Fund managers' positioning is still a Q1 positive for risk assets."

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Trade war risks topped the survey's key concern for a ninth straight month, BAML said, followed by worries of slowing economic growth in China (21%) and a corporate credit crush (12%). 

"Investors' worries about the credit cycle remain elevated, falling just 2 percentage points from last month," BAML said. "A net 46% of fund managers find corporate balance sheets to be overleveraged."

"Long emerging markets" was cited as the survey's 'most crowded trade' for the first time ever, BAML noted, a sharp reversal from only three months ago when it was considered only the third most popular. "Long USD" trades, which "long FAANG+BAT" two months ago, remained the second and third most crowded trades, BAML said.