Rising geo-political temperatures combined with the threat of rising U.S. 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 percent of respondents to the global survey overweight cash in August, up from a net 12 percent in July. Cash now accounts for an average of 5.1 percent of global portfolios, up from 4.5 percent 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 percent 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 percent of the global panel expects the economy to strengthen in the year ahead, a fall from a net 69 percent 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 percent of respondents naming it their number one “tail risk” this month, up from 28 percent a month ago. But a new question in the survey highlights how a rate hike is also playing on investors’ minds – 65 percent 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,” said 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,” said Manish Kabra, European equity and quantitative strategist.