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Investors look to cash in risk aversion

Tuesday, May 13 14:16:16

Global investors have increased cash and scaled back risk-taking amid fears of geopolitical instability and questions about the strength of the global economic recovery.

That's according to the BofA Merrill Lynch Fund Manager Survey for May, which found that investors are sitting on more cash and have reduced equity holdings compared to a month ago.

Average cash levels have reached 5pc of portfolios – the highest level since June 2012 and up from 4.8pc in April. A net 22pc are taking below normal levels of risk, up from 11pc a month ago. The proportion of asset allocators overweight equities has fallen to a net 37pc from a net 45pc last month.

Respondents to the global survey are confident that both the world economy and corporate performance are improving, but question the rate of growth. A net 66pc of the panel expects the economy to strengthen in the coming 12 months, up from a net 62pc in April. A net 49pc say that corporate profits will rise in the coming year, up fivepcage points month-on-month. But nearly three-quarters (72pc) predict “below trend” growth for the global economy, and a net 20pc say it’s unlikely corporate profits will grow by 10pc or more in the year ahead.

Investors also see two major risks to market stability. One-third of the global panel believes that the risk of Chinese debt defaults poses the biggest tail risk. And 36pc say a geopolitical crisis is the greatest threat.

“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.

“Specifically, within Europe, investors are all aboard the periphery train, and there’s now simply no margin for error. Spanish and Italian equities are preferred over those in the U.K. and Switzerland, while eurozone periphery debt is seen as the most crowded trade globally,” said Obe Ejikeme, European equity and quantitative strategist.

European equities have bucked the broader monthly trend of seeing allocations scaled back, and investors have indicated the positive flows should continue. A net 36pc of global asset allocators say they are overweight eurozone equities, up from a net 30pc in April. Allocations to other developed markets, namely the U.S. and Japan, fell month-on-month.

Europe is also the region most in favour looking ahead. A net 28pc say that it’s the region they most want to overweight in the coming 12 months, up from a net 23pc a month ago. A net 14pc say that European equities are undervalued.

The U.S. is the least-favoured region with a net 18pc saying it’s the region they most want to underweight, up from a net 9pc in April. Forward-looking sentiment for emerging markets has improved slightly over the past month and a net 3pc say it’s the region the most want to overweight.