Investors have been pulling back from risk and building up cash levels in response to rising geopolitical risk, and the prospect of rising U.S. interest rates, according to the latest fund manager survey from BofA Merrill Lynch.
The firm reports that global investors have shifted into cash over the past month, with a net 27% of respondents saying they are now overweight cash, up from a net 12% in July. Cash now accounts for an average of 5.1% of global portfolios, up from 4.5% a month ago, Merrill adds.
In shifting towards cash, fund managers are pulling back from equities. The survey found that the proportion of asset allocators that are overweight in equities has plunged by 17 percentage points in one month, to a net 44% in August. “The number of survey respondents hedging against a sharp fall in equity markets in the coming three months has reached its highest level since October 2008,” it notes.
Merrill says that fears of a geopolitical crisis are the biggest cause of the reduction in risk, with 45% of respondents citing geopolitics as their number one “tail risk” this month, up from 28% a month ago. At the same time, it suggests that rate hikes are also weighing on investors’ minds, with 65% of respondents expecting a U.S. rate rise before the end of the first half of 2015. And, it says that global growth forecasts have fallen since July too, with a net 56% of investors expecting the economy to strengthen in the year ahead, down from 69% last month.
“The market melt-up is over, or at least on pause, as investors seek refuge while they digest world events and the prospect of higher rates,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Research.
In particular, Europe has fallen from grace as an investment destination, the firm says, as the survey revealed “a big negative swing in the number of investors currently overweight European equities and an even greater negative swing in sentiment about the future.”
It reports that just 13% are now overweight Eurozone equities, which is a fall of 22 percentage points in one month. And, a net 30% of global investors believe that the 12-month profit outlook is worse is Europe than in any other region, it says.
On the bright side, the survey found that global emerging markets (GEMs), and to a lesser extent Japan, are avoiding the global trend of pessimism. It found that a net 30% of investors are now overweight Japanese equities, up from 26% in July. The momentum for emerging markets is even stronger, with the proportion that are overweight the region rising to a net 17% in the latest survey from 5% in July. “Behind the improvement is stronger belief in China and in commodities,” it says.
Indeed, Merrill reports that fewer global asset allocators are underweight commodities, with this reading dropping to a net 5% in August from 15% in July. Looking ahead, it reports that a net 21% of investors say that emerging markets is the sector they most want to overweight in the next 12 months, up from 4% in July.
By asset class, investors are favouring large-cap stocks and value-driven investment this month, Merrill says. It reports that the proportion of respondents favouring value over growth investing has reached a record level of a net 48%.
“Value investing is typically in favour during ‘risk off’ phases, but the high this month outstrips even previous highs in 2009 in the aftermath of the financial crisis,” it reports. Additionally, it says that a net 59% believe that large caps will outperform small caps; which is the highest reading in two years.
A total of 224 panelists, with US$675 billion of assets under management, participated in the latest survey from August 1 to 7.