Stay long cash on a 'tactical' basis, BofA Merrill says

Don´t be fooled, the flow of money into and out of the different asset classes over the latest week continued to show a clear 'deflationary' mind-set, despite the better tone to markets seen at the end of January, Bank of America-Merrill Lynch´s Michael Hartnett said in a research note sent to clients.

He pointed to the weekly $0.4bn outflow from inflation-protected US Treasury notes or so-called TIPS - the largest in 33 weeks.

Funds investing in bank loans meanwhile suffered a 13th consecutive rush of money leaving, to the tune of $0.7bn.

Emerging market, investment grade and high-yield bond funds also saw investors head for the exit.

In a separate note sent to clients, Hartnett explained how investment trends since the 'market-bottom' reached in 2008-09 were "doggedly deflationary".

"The underlying message from Wall Street in recent years (underperformance of bank stocks, stubbornly low government bond yields, all-time relative highs in “high quality” stocks, and sustained outperformance of “growth” stocks over “value” stocks) has been doggedly deflationary," he said.

"Our tactical asset allocation advice remains "long cash" until the "4C's" (China, Commodities, Credit, and Consumer) improve," he added.

One well-known contrarian investor, David Santschi, TrimTabs Investment Research´s boss, had a similar take on the market.

“People here are just are not concerned. They jawbone about more money printing every time major stock indices drop. We suspect they are betting that stock prices have dropped far enough that central bankers will ride to the rescue, as they have been conditioned to believe for the past seven years.

“The lack of fear among investors, plus the lack of outflows is shocking, strikingly contrarian,” he said in a e-mailed statement during his visit to London this week.