The proportion of fund managers who expect a "Goldilocks" economic backdrop of above-trend growth and below-trend inflation over the next year has reached a record high, with a significant percentage also viewing recent low levels of inflation as a long-term trend.
The latest global fund manager survey from Bank of America Merrill Lynch (BAML) found that the proportion of respondents expecting a 'Goldilocks' scenario had risen by six percentage points to 42 per cent, marking a new record.
A large number of respondents also suggested recent low levels of inflation could prevail on a long-term basis. When asked to describe the low level of inflation, 43 per cent dubbed it 'structural', with 35 per cent describing it as cyclical and 21 per cent viewing the phenomenon as temporary.
The findings come at a time when, in the UK, inflation has faltered, with some commentators suggesting the upwards trajectory for prices had peaked despite factors such as currency depreciation.
As such, professional investors appeared unconcerned about central bank tightening. Some 48 per cent of respondents described the impact of the Federal Reserve's balance sheet reduction plans as a 'non-event', while 31 per cent expected any decrease to trigger a risk-off event, that could send bond yields higher and equities lower.
In other respects, investors continued to take a bearish stance. Only a net 33 per cent thought corporate profits would improve over the next 12 months, marking the lowest level since November 2015.
Concerns about valuations continued to escalate, with a net 46 per cent of respondents warning equity markets were overvalued. This marked a new high from the 44 per cent recorded in June.
Asset allocation decisions reflected such fears, with managers continuing to hold high levels of cash. The average cash balance remained at 4.9 per cent, still above the past 10-year average of 4.5 per cent.
Michael Hartnett, chief investment strategist for BAML, suggested that the shift in profit expectations could trigger a market rotation.
"Investors' expectations of corporate profits have taken an ominous turn this year, which is a warning sign for equities over bonds, high yield over investment grade and cyclical sectors over defensive ones," he said. "Further deterioration is likely to cause risk-off trades."
Respondents continued to grow warm towards some of 2017's most popular investment narratives. In the latest survey, a net 25 per cent thought emerging markets had a favourable profit outlook, up 16 percentage points from July.
Sentiment on Europe weakened slightly, with a net 25 per cent thinking the region had a favourable profit outlook, down 24 percentage points from last month.
