By Sujata Rao
LONDON (Reuters) - Global funds are showing signs of "irrational exuberance", with cash holdings at four-year lows and risk-taking at all-time highs, Bank of America Merrill Lynch's monthly investor survey said on Tuesday.
BAML said the survey results showed that the recent pause in world stocks was justified, though the bank held off calling time on the rally, predicting more gains into 2018.
The bank's survey of investors managing $610 billion (£465.3 billion) in assets dubbed the November allocation shifts as "capitulation into risk assets" and added:
"Measures of global risk appetite increased noticeably this month with cash allocations much lower, equity weightings up and increased exposure to risk."
There were exceptions - a near-record 37 percent underweight position on UK equities for instance- but overall, a record high proportion of funds said they were taking "above normal" risks.
Higher-than-normal risk - http://reut.rs/2zVWdOP
Average cash balances slipped to 4.4 percent, the lowest reading since October 2013 and below 10-year average levels, while hedge funds' equity exposure was at 11-year highs.
But despite cutting cash, a record-high 48 percent of survey participants considered equities to be overvalued - a sign of irrational exuberance, according to BAML.
The bank said the cash levels showed equities were no longer in Buy territory as per survey rules but would need to fall below 3.5 percent for a Sell signal to be generated.
"The all-time low for global cash balances was 3.4 percent in July 2007 and it has often troughed out below 4 percent, suggesting risk appetite has not maxed out," BAML said.
Funds held a net 49 percent overweight, the highest level since April 2015, with U.S. allocations rising to a net 16 percent underweight versus 23 percent in October.
Euro zone and emerging equity allocations were a net 47 percent and 43 percent overweight respectively while the Japan overweight almost doubled since October to 23 percent.
But the UK, with allocation at the lowest since the global financial crisis, was the consensus short, BAML said.
The most crowded trade was U.S. tech stocks listed on the Nasdaq index - in that position for the sixth time this year - along with junk debt and short-volatility positions, the poll showed.
(Reporting by Sujata Rao; editing by Mark Heinrich)