BofA Merrill Lynch Fund Manager Survey Finds Investors Moving Toward a “Risk-off” Position Amid Geopolitical Unrest

Responding at a point of growing tension in Ukraine, 81 percent of investors said they see geopolitical risk posing a threat to financial markets stability – more than four times the reading one month ago. Twenty-seven percent of investors say that a geopolitical crisis is the biggest tail risk – up from 12 percent in February. At the same time, investors continue to express concern about the prospects for emerging markets – with sentiment towards China’s economy falling further.

Investors have reacted by showing reduced optimism about the prospect for corporate profits globally and by reining in risk. They have increased cash allocations, reduced equity holdings and taken on greater protection.

The proportion of investors taking lower than average risk in their portfolio has increased to a net 14 percent from a net 2 percent in February. A net 16 percent of global asset allocators say that they are overweight cash, up from a net 12 percent last month. Average cash balances remain high at 4.8 percent of portfolios. The proportion of asset allocators overweight equities has dropped by nine percentage points month-on-month to a net 36 percent. Demand for protection against sharp falls in equity markets has increased to its highest level in 22 months.

Hedge Funds Scale Back Leverage and Equity Allocations

“With neither inflation nor recession posing a threat, we believe the equity bull market is far from over and investors should be putting excess cash into risk assets,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.

“We see signs that recent exuberance in sentiment and positioning in Europe is waning. While Europe’s recovery remains in play, markets likely need to consolidate further before resuming their upward trend,” said John Bilton, European investment strategist.

Corporate optimism off highs

Investors have scaled back their belief in a vibrant recovery in corporate profit growth – but remain positive. A net 40 percent of global investors believe that global profits will improve in the coming 12 months, down from a net 45 percent in February. A net 12 percent say that it’s unlikely corporate profits will rise by 10 percent or more in the year ahead, up from 4 percent of the panel taking that view in February.

At the same time, investor demand for companies to borrow and invest has eased. A net 34 percent of respondents say that corporate balance sheets are underleveraged, down from a net 40 percent last month. A net 63 percent believe that companies are underinvesting, down from last month’s high of a net 67 percent.

Sectoral allocations this month reinforce a defensive mindset with a sharp fall in allocations towards banks and a rise in allocations to energy companies and utilities.

Hedge funds take risk-off stance

Hedge fund managers provide an illustration of the risk-off mentality taking shape in this month’s survey, having reduced both leverage and exposure to equities. The weighted average ratio of gross assets to capital has fallen to 1.34 times from 1.49 times, the lowest in 20 months. Thirty-one percent of hedge funds have a leverage ratio of less than one time – compared with 19 percent in January.

Weighted net exposure to equities has fallen to 29 percent, down three percentage points month-on-month from 38 percent in January and the lowest since June 2012.

Emerging market sentiment close to lows?

The investor panel has indicated that sentiment towards global emerging markets is close to reaching a low and that improvement is in sight. While the view towards China has deteriorated further, investors see scope to return to the region.

A net 47 percent of regional fund managers in Japan, Asia Pacific and global emerging markets expect China’s economy to weaken in the coming year, up from a net 41 percent a month ago. The proportion of global asset allocators underweight emerging market equities has risen two percentage points month-on-month to a net 31 percent – a new record low.

On the brighter side, investors have indicated that they see value in the region. A record net 49 percent of the global panel believes that emerging markets is the most undervalued of the regions, compared with a net 36 percent in January. Furthermore, the proportion saying that emerging markets is the region they would most like to underweight in the coming year has fallen three percentage points month-on-month to a net 21 percent.