Investors lift cash holdings to two-year highs
Investors have increased their holdings of cash to the highest in nearly two years and scaled down risk-taking, amid fears of geopolitical instability and questions about the strength of the global economic recovery.
Despite Wall Street and European indices hitting record and near-record highs, investors are sitting on more cash and have reduced equity holdings compared with a month ago, the latest BofA Merrill Lynch fund manager survey shows.
Investors also see two significant risks to market stability. One-third of the global panel believes the possibility of Chinese debt defaults poses the biggest risk, while 36 per cent 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.
Average cash levels have reached 5 per cent of portfolios, the highest since June 2012 and up from 4.8 per cent in April. A net 22 per cent are taking below normal levels of risk, up from 11 per cent a month ago. The proportion of asset allocators overweight equities has fallen to a net 37 per cent from a net 45 per cent last month.
European equities have bucked the broader monthly trend of seeing allocations scaled down and investors have indicated the positive flows should continue.
A net 36 per cent of global asset allocators say they are overweight eurozone equities, up from a net 30 per cent in April. Allocations to other developed markets, namely the US and Japan, fell month-on-month.
“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 UK and Switzerland, while eurozone periphery debt is seen as the most crowded trade globally,” said Obe Ejikeme, European equity and quantitative strategist.
Europe is the region most in favour, looking ahead. A net 28 per cent say it is the region they most want to be overweight in the coming 12 months, up from a net 23 per cent a month ago. A net 14 per cent say European equities are undervalued.
The US is the least-favoured region, with a net 18 per cent saying it is the region they most want to be underweight in, up from a net 9 per cent in April. Forward-looking sentiment for emerging markets has improved slightly over the past month and a net 3 per cent say it is the region they most want to be overweight in.