LONDON (Reuters) - Riskier assets were in vogue this week as investors poured $8.9 billion into equities, but strategists at Bank of America Merrill Lynch said flows data indicated positioning remained shy of peak levels.
Bonds also drew in money for the 26th straight week, as investors hungry to earn a return rushed into U.S. Treasury funds, which enjoyed their biggest inflows in 62 weeks, EPFR figures showed.
Though these flows indicated the "Icarus" trade pushing stock markets higher was alive and kicking, BAML strategists, who have been forecasting a correction this autumn, pointed to signs investors were not overly exuberant.
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The equity allocation among the bank's private clients ticked lower and remained below its all-time high, while ETF flows showed investors shifted money back into deflation assets this month, seeking diversification away from the reflation trade.
The bank's "bull-bear" indicator of investor sentiment held steady at 7, with strategists saying a correction was most likely if it edged above 8 and fund managers increased their exposure to risky assets, pointing to a peak in positioning.
A stock market fall could also be precipitated by GDP estimates catching up with earnings-per-share, or a U.S. tax reform announcement which would then focus investors' attention solely on monetary tightening, they said.
"Downtrend in Fed liquidity and ECB taper remain necessary conditions for a correction," BAML's strategists added, saying they expect the Fed to announce balance sheet reduction at its Sep. 20 meeting.
U.S. stocks attracted their biggest inflows in 13 weeks, indicating contrarian bets as BAML's fund manager survey this week showed the largest aggregate underweight on the U.S. since 2007.
U.S. small-cap stocks, which are increasingly acting as a bellwether for expectations the Trump Administration will reach a deal to cut tax rates, drew their largest flows in six weeks.
Exchange-traded funds (ETFs) attracted $12.5 billion this week, continuing to sap money from mutual funds which suffered $3.7 billion of outflows.
Asset classes attracting the biggest flows year-to-date have been financials, technology, and emerging debt, while the least popular are real estate, healthcare and U.S. stocks.
Tech stocks, emerging market equities and healthcare have delivered the strongest returns year-to-date while the U.S. dollar, energy and TIPS have been the worst bets.
(Reporting by Helen Reid; Editing by Hugh Lawson)