Rising geo-political temperatures combined with the threat of rising US interest rates have led global investors to scale back risk and take cash levels to two-year highs, according to the BofA Merrill Lynch Fund Manager Survey for August.
Investors have shifted robustly into cash with a net 27 per cent of respondents to the global survey overweight cash in August, up from a net 12 per cent in July.
Cash now accounts for an average of 5.1 per cent of global portfolios, up from 4.5 per cent a month ago. Both cash readings are at their highest since June 2012.
The proportion of asset allocators overweight equities has tumbled by 17 percentage points in one month, to a net 44 per cent 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.
Global growth predictions have fallen since July but remain firm. A net 56 per cent of the global panel expects the economy to strengthen in the year ahead, a fall from a net 69 per cent in the previous month. However, sentiment towards Europe has fallen significantly – the earnings outlook for the region suffered its greatest monthly fall since the survey started.
Fears of a geopolitical crisis is the biggest cause of risk-reduction – with 45 per cent of respondents naming it their number one “tail risk” this month, up from 28 per cent a month ago. But a new question in the survey highlights how a rate hike is also playing on investors’ minds – 65 per cent of the panel expects a U.S. rate rise before the end of the first half of 2015.
“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,” says Michael Hartnett, chief investment strategist at BofA Merrill Lynch Research.
“We see further de-risking to come in Europe. Negativity in this month’s survey towards Europe reflects growing softness in economic data from both the core and periphery of the region,” says Manish Kabra, European equity and quantitative strategist.
Europe’s status as the world’s market darling for much of 2014 has all but evaporated in the past month, with a big negative swing in the number of investors currently overweight European equities and an even greater negative swing in sentiment about the future.
A net 13 per cent of asset allocators are overweight Eurozone equities – a fall of 22 percentage points in one month. US equities also lost ground but only a four percentage point drop to a net six per cent. Furthermore, a net 30 per cent of global investors believe that the 12-month profit outlook is worse is Europe than in any other region. That reading has fallen 24 percentage points since July – a record one-month swing.
It’s not surprising therefore that Europe has now become more of a region to underweight than overweight. A net four per cent of investors want to underweight Europe more than any other region. In July, a net 10 per cent wanted to overweight Europe. The survey also highlights growing pressure on the euro. A net 40 per cent saying that it is the currency they most expect to depreciate (on a trade-weighted basis), a reading that represents a two-year high in negativity towards the euro, up from a net 28 per cent in July.
Global emerging markets (GEM), and to a lesser extent Japan, have bucked the wider global trend of pessimism. A net 30 per cent of asset allocators are now overweight Japanese equities, a rise from a net 26 per cent in July and making Japanese equities the most popular of the five regions.
GEM has shown the greatest momentum, with the proportion of asset allocators overweight the region rising to a net 17 per cent from a net five per cent in July. Behind the improvement is stronger belief in China and in commodities. A net six per cent of regional fund managers expect the Chinese economy to improve in the coming 12 months – the first positive outlook of 2014. Just two months ago, a net 42 per cent forecast China’s economy to weaken.
Fewer global asset allocators are underweight commodities – a net five per cent compared with a net 15 per cent in July. Looking ahead, a net 21 per cent of investors say that GEM is the region they most want to overweight in the next 12 months, up from a net four per cent in July.
Investors have expressed unusually strong opinions in favour of large-cap stocks and value-driven investment this month. The proportion of respondents favouring value over growth investing has reached a record level of a net 48 per cent. 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. A net 59 per cent believe that large caps will outperform small caps, the highest reading in two years.