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Investors doubting strength of recovery, says BoAML fund manager survey

Investors have increased cash and scaled back risk-taking amid geopolitical instability fears and questions about the strength of the global economic recovery, according to BofA Merrill Lynch’s Fund Manager Survey for May.

Investors are sitting on more cash and have reduced equity holdings compared to a month ago.
 
Average cash levels have reached five per cent of portfolios -- the highest level 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.
 
Respondents to the global survey are confident that both the world economy and corporate performance are improving, but question the rate of growth. 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 in April. A net 49 per cent say that corporate profits will rise in the coming year, up five percentage points month-on-month. But nearly three-quarters (72 per cent) predict "below trend" growth for the global economy, and a net 20 per cent say it is unlikely corporate profits will grow by 10 per cent 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?" says 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," says Obe Ejikeme, European equity and quantitative strategist.
 
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 is 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.
 
The US is the least-favoured region with a net 18 per cent saying it is the region they most want to underweight, up from a net nine per cent in April. Forward-looking sentiment for emerging markets has improved slightly over the past month and a net three per cent say it is the region the most want to overweight.
 
Nonetheless, the panel has sounded two warnings about European assets. First is that 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 ECB governor Mario Draghi hinting towards policies that could lead to weakness in the euro.
 
European investors' view of their region reflects the global perspective. They forecast economic growth, but a net 30 per cent predict less than 10 per cent corporate profit growth in the region. Average cash balances have risen to 4.8 per cent, from 3.8 per cent in April.
 
Changes in global sectoral equity allocations from April to May reinforced the sense of investors scaling back risk. The biggest positive swings were towards utilities and energy, with a net 15 per cent of investors increasing their allocations to these more defensive sectors. A net 14 per cent of investors scaled back positions in banks, and a net eight per cent reduced holdings in technology.
 
While investors have increased their cash levels close to two-year highs, they remain keen to see companies put their cash to work. A net 66 per cent of the global panel says that corporates are under-investing, up two percentage points on April's figure. And 60 per cent say that "increasing capital spending" is the best use of cash flow, up from 58 per cent last month.

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