As a sign of increased caution, investors in May had the highest average allocation to cash in their total portfolios – 5 per cent – at any time since June 2012, according to a survey of global fund managers.

As a sign of increased caution, investors in May had the highest average allocation to cash in their total portfolios – 5 per cent – at any time since June 2012, according to a monthly survey of the world’s investment funds by Bank of America Merrill Lynch.

The survey, conducted among 218 respondents with a total of $587 billion of assets under management, showed that fears of rising geopolitical risks – as highlighted by the Russia/Ukraine conflict – are cooling enthusiasm for equities and other relatively risky assets. The survey was carried out between 1 May and 8 May.

Separately, a report yesterday from Rothschild Wealth Management stated that it continues to be positive about global economic trends in general but has recommended hedging strategies to deal with downside risks, flagging the central European flareup as a reason for caution. Stock markets have had a lacklustre year so far. Since the start of January, the MSCI World Index of developed countries’ stock markets has barely begun to match last year’s total returns (capital growth added to reinvested dividends) of 26.7 per cent; as of yesterday, since the start of January, returns were just 2.89 per cent. The willingness by investors to hold as much cash is striking given that for some time, global official interest rates have been very low, sometimes even negative in real, inflation-adjusted terms.

The average cash holding in percentage terms rose from 4.8 per cent in April, the survey said. A net 22 per cent of respondents 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. (The net figure is based on subtracting those who are underweight from overweight.)

Questions
Respondents are, however, confident that the world economy and corporate performance are improving. They do, even so, question how fast growth will prove to be. A net 66 per cent of the panel expects the economy to strengthen in the coming 12 months, up from a net 62 per cent taking that view in April. A net 49 per cent say corporate profits will rise in the coming year, up five percentage points month-on-month.

Almost three-quarters (72 per cent) predict “below trend” growth for the global economy, and a net 20 per cent say it’s unlikely corporate profits will grow by 10 percent 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 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.

“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 at the same firm.

Europe
European equities have bucked the broader monthly trend of seeing allocations scaled back, 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.

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

Out of favour
The US, meanwhile, is the least-favoured region with a net 18 per cent of respondents saying it’s the region they most want to be bearish on, up from a net 9 per cent taking this view a month earlier.

However, respondents warned about European assets. Significantly more investors say that being long EU periphery debt is the most crowded trade – 35 per cent of the panel take that view this month, up from 19 per cent in April. Investors also continue to see the euro as the most overvalued currency, with 58 per cent of the panel taking that view ahead of European Central Bank governor Mario Draghi hinting towards policies that could lead to weakness in the euro.