Geopolitical Crisis, Threat of Rising U.S. Interest Rates Prompt Investors' Shift to Cash

Global investors are scaling back risk and taking cash levels to two-year highs as a result rising geopolitical tensions combined with the threat of rising U.S. interest rates, 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.

Emerging markets shine again

Global Emerging Markets (GEM), and to a lesser extent Japan, have bucked the wider global trend of pessimism. A net 30 percent of asset allocators are now overweight Japanese equities, a rise from a net 26 percent in July and making Japanese equities the most popular of the five regions.

GEM has shown the greatest momentum, with the proportion of asset allocators overweight the region rising to a net 17 percent from a net 5 percent in July.

Behind the improvement is stronger belief in China and in commodities. A net 6 percent of regional fund managers expect the Chinese economy to improve in the coming 12 months – the first positive outlook of 2014. Just two months ago, a net 42 percent forecast China’s economy to weaken.

Fewer global asset allocators are underweight commodities – a net 5 percent compared with a net 15 percent in July. Looking ahead, a net 21 percent of investors say that GEM is the region they most want to overweight in the next 12 months, up from a net 4 percent in July.

Investors pursue big caps and value

Investors have expressed unusually strong opinions in favor of large-cap stocks and value-driven investment this month. The proportion of respondents favoring value over growth investing has reached a record level of a net 48 percent.

Value investing is typically in favor during “risk off” phases, but the high this month outstrips even previous highs in 2009 in the aftermath of

the financial crisis. A net 59 percent believe that large caps will outperform small caps, the highest reading in two years.

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