Asset allocators have been adjusting portfolios in the face of falling world markets, significantly reducing their holdings in equities, according to the survey completed between June 3 and June 9. The net percentage overweight equities fell to 27 percent from 41 percent in May, with Europe leading the way. The proportion of investors’ underweight eurozone equities rose to a net 15 percent from a net 1 percent. The proportion of investor’s overweight commodities fell to a net 6 percent from a net 12 percent.
A net 18 percent of asset allocators are now overweight cash. This represents the highest cash overweight level since July 2009 and a sharp move upwards from last month’s reading of a net 6 percent. Investors have an average cash balance of 4.2 percent of their portfolio, up from 3.9 percent in May. The proportion of investors taking lower-than-average risk across their portfolios has risen to a net 26 percent from a net 15 percent in May.
Bonds, unloved throughout much of the past two years, have enjoyed a recovery during the past two months. A net 35 percent of asset allocators are underweight bonds, compared with a net 58 percent in April and 44 percent in May.
Behind the shifts in allocations are concerns about sovereign debt funding in Europe, which investors have named as the biggest tail risk in this month’s survey. Investors have also lowered expectations of strong growth in global profits, but broad sentiment towards the global economy has stabilized. While economic optimism is down, investors are not pessimistic enough to be calling for a third round of quantitative easing (QE3). Nearly two-thirds of the panel says that they do not expect QE3.
“Investors are scaling back risk, but rather than capitulating, they are simply moving to neutral positions in equities, bonds and cash,” said Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research. “Investor capitulation from risk assets is not yet visible despite higher cash levels and defensive rotation. Fears on global growth will need to rise further before hopes for QE3 can begin to be priced in,” said Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research.
Investors are struggling to form a clear and consistent view towards emerging markets. While optimism towards emerging market equities as a whole is on the up, concerns over the direction of China’s economy continue to grow.
Allocation to emerging market equities fell in June, with a net 23 percent of asset allocators overweight the region, down from a net 29 percent in May. Looking ahead, however, emerging markets could become the preferred destination for investment once again.
A net 22 percent of investors would most like to overweight emerging market equities, up from a net 16 percent a month ago when the U.S. was ranked number one. A net 29 percent believes the outlook for corporate profits is more favorable in emerging markets than any other region, up from a net 19 percent in May.
This optimism sits in contrast to evidence of growing pessimism towards China, the engine of emerging market growth. A net 40 percent of regional fund managers from across emerging markets, Asia-Pacific and Japan, believe that China’s economy will weaken in the coming 12 months. This represents the most negative sentiment towards China in more than two years and a shift of 12 percentage points in the past month. Regional investors have reduced exposure to Chinese equities. A net 33 percent of global emerging market investors are overweight China, down from a net 42 percent a month ago.
In line with the cautious, risk-averse tone of June’s survey, investors have reduced allocations to cyclical sectors such as Industrials, Discretionary and Materials. The largest reduction in allocations during the month was in Insurance, in the wake of claims stemming from a series of catastrophic events including earthquakes, hurricanes and tornadoes. The only sectors to see increased allocations were traditional counter-cyclical Pharmaceuticals and Utilities.
An overall total 282 panelists with $828 billion of assets under management participated in the survey from 3 June to 9 June. A total of 199 fund managers, managing a total of $634 billion, participated in the global survey. A total of 155 managers, managing $379 billion, participated in the regional surveys.