By Helen Reid
LONDON (Reuters) - Voracious investor appetite is set to make this by far the strongest year for inflows into stocks and corporate debt, Bank of America Merrill Lynch (NYSE:BAC) strategists said on Friday.
A blizzard of record highs for global stock markets has seen demand for riskier assets surge this year. Inflows are up $534 billion year-to-date which is already almost double the previous record of $281 billion set back in 2013.
Over the past week investors ploughed $8.9 billion more into equities and $6.9 billion into bonds, BAML strategists said, citing EPFR data that runs from Wednesday to Wednesday.
Asset allocators were decidedly bullish, with equities at 60.7 percent of portfolios and cash allocations touching a new low at 10.2 percent.
Seemingly bottomless enthusiasm for risky assets has pushed BAML's bull and bear indicator to elevated levels, at 7.6, and strategists warned positioning was stretched ahead of potential catalysts for a sell-off.
BAML strategists have been pushing back their predictions for a stock market correction as equities stubbornly climb higher in a bull market they have dubbed the "Icarus" trade.
The market could yet be shaken, however, by a successful U.S. tax reform bill which they say would cause a peak in enthusiasm.
"Big week for Icarus coming up," strategists wrote, pointing to the bill set to be unveiled by Republicans on Nov 1.
Expectations that tax reform would boost companies' bottom line have been a main driver behind the surge in global stocks after Trump's election just under a year ago.
U.S. stocks have drawn in $13.4 billion over the past four weeks as progress on tax reform plans reignited interest in the market.
A global monetary tightening cycle led by the U.S. central bank could also send jitters through equity markets thus far buoyed by historically low bond yields.
"Inflation and fear of Fed remains No.1 reason for Q4 volatility/sell-off; in contrast more disinflation data and it's Icarus Unleashed," strategists wrote.
Outflows from local currency emerging market debt and equity funds this week provided the first hint that higher Treasury yields could curb investors' enthusiasm for high-yielding emerging market assets.
Emerging market debt has been one of the most popular asset classes this year, drawing the largest inflows along with financials and tech stocks.
Tech and financials remain the best-performing U.S. sectors, strategists said, and global tech one of the biggest inflow winners.
Impressive results from tech giants Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL) have added to exuberance over the sector this week, and Europe's tech sector index is trading at its highest in nearly 16 years.
Real estate investment trusts and defensive sectors meanwhile have suffered outflows year-to-date as investors shun higher-yielding, safer stocks in favor of booming technology companies.