Global investors are pulling back from risk and increasing their cash positions, amid rising geopolitical tensions and doubts about the strength of the global recovery, according to BofA Merrill Lynch’s latest fund manager survey.
The firm reports that institutional investors are sitting on more cash, and have reduced their equity holdings, compared to a month ago. Average cash levels are now up to 5% of portfolios, it says, which is the highest level since June 2012. And, it says that a net 22% are taking below normal levels of risk, up from 11% last month. The proportion of asset allocators that are overweight equities has fallen to a net 37% from 45% last month, it reports.
“Respondents to the global survey are confident that both the world economy and corporate performance are improving, but question the rate of growth,” Merrill says. It reports that a net 66% expect the economy to strengthen in the coming 12 months, and that a net 49% say they expect corporate profits to rise in the coming year.
However, 72% are also predicting “below trend” growth for the global economy, it notes; and, a net 20% say that it’s unlikely corporate profits will grow by more than 10% this year.
Merrill says that investors also see two major risks to market stability: a geopolitical crisis, and the risk of Chinese debt defaults. “Investors are showing belief in the economy but with two big question marks: Are we on the brink of a disruptive event? And why, at this point in the cycle, isn’t this recovery stronger?” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
In this environment, Europe is the region investors are favouring, it reports, with a net 28% naming Europe as the region they most want to overweight in the coming 12 months. And, a net 14% say that European equities are undervalued, it says.
The U.S. is the least-favored region, Merrill notes, with a net 18% saying it’s the region that they most want to underweight, up from 9% in April. At the same time, sentiment about emerging markets has improved slightly over the past month, it says.
Equity allocations to the U.S. and Japan fell over the past month, the firm says. However, European equities have bucked that trend, and investors indicate the positive flows should continue, it notes. It says that a net 36% of global asset allocators say they are overweight eurozone equities, up from 30% in April.
Still, there are concerns about European assets, it notes, including that investors continue to see the euro as the most overvalued currency.
In terms of sector allocations, Merrill says that this also reinforces the sense of investors scaling back risk. “The biggest positive swings were towards utilities and energy, with a net 15% of investors increasing their allocations to these more defensive sectors,” it says, adding that at the same time investors trimmed their positions in banks and technology companies.
The results are based on a survey of 218 money managers with US$587 billion in assets under management.