Investors’ optimism about the global economic outlook has hit its lowest level for nearly seven years, according to a widely-watched survey which found that the decoupling between the US and the rest of the world is expected to continue.

Some 24 per cent of investors expect global growth to decelerate in the next 12 months, the Bank of America Merrill Lynch monthly fund manager survey found, the worst outlook on the global economy since December 2011.

But expectations of the outlook for US earnings are at a 17-year high, with bets on US equities at a four-year high. Bets that the dollar will rise are one of the three most crowded trades.

Combined with investors’ portfolio weightings of investment-grade bonds, which have hit a 10-year low, this suggests that the markets are bracing for a hawkish monetary policy tightening cycle from the US Federal Reserve, BofAML said.

Meanwhile the outlook for the rest of the world is becoming cloudier: one of the other top three most crowded trades was to short, — i.e. to bet against — emerging markets, while investors’ cash holdings climbed to an 18-month high of 5.1 per cent of their portfolios.

Other popular shorts were UK assets and resources and commodities.

Investors continue to rate a global trade war as the biggest potential tail risk, although those concerns have receded somewhat over the past two months. The risk of a China slowdown is a growing concern, however, along with the consequences that quantitative tightening could have on the markets.

Month-on-month, investors have rotated out of emerging markets, banks and materials and into Japanese assets, healthcare and industrials.

The findings reflect the extent to which the recent sell-off in emerging markets has reinforced investors’ expectations that the divergence between the US and the rest of the world will continue.

“Investors are holding on to more cash, telling us they are bearish growth and bullish US decoupling,” said Michael Hartnett, BofAML chief investment strategist. “Fund managers are signalling that they are starting to price in a hawkish Fed.”

BofAML surveyed 244 investors with $742bn assets under management.

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