Investors Turn to Cash Amid Geopolitical Tensions, Interest Rate Rise Fears - BoA Merrill Lynch

Stephen Little

14 August 2014

Investors are scaling back risk and turning to cash as result of rising geopolitical tensions and the threat of rising interest rates, according to the latest fund manager survey for August.

The survey found that a net 27 per cent of respondents were overweight cash in August, up from a net 12 per cent in July, accounting for an average of 5.1 percent of global portfolios, an increase of 4.5 per cent a month ago, as concerns over geopolitical risk increased. The survey questioned a total of 224 panellists with $675 billion of assets under management between them.

A total of 45 per cent of respondents said geopolitical risk was their number one “tail risk” this month, up from 28 per cent a month ago.

The survey also highlighted how a rate hike is also playing on investors’ minds, with 65 per cent of the panel expecting a US 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 BoA Merrill Lynch Research.

Global growth predictions have fallen since from a net 69 per cent in July to 56 per cent, while sentiment towards Europe has fallen significantly, with the earnings outlook for the region suffering its greatest monthly fall since the survey started.

In eurozone equities, 13 per cent of asset allocators are overweight, a fall of 22 percentage points in one month, while US equities also lost ground with a 4- percentage point drop to a 6 per cent.

Furthermore, 30 per cent of global investors believe that the 12-month profit outlook is worse is Europe than in any other region.

Emerging markets

Asset allocators are now 30 per cent overweight Japanese equities, a rise from a net 26 per cent in July, making Japanese equities the most popular of the five regions. Global emerging markets showed the greatest momentum as a result of stronger belief in China and in commodities, with the proportion of asset allocators overweight the region rising to 17 per cent from 5 per cent in July.

In the coming 12 months, 6 per cent of regional fund managers expect the Chinese economy to improve, compared to 42 per cent that forecast China’s economy to weaken two months ago.

Fewer global asset allocators are underweight commodities - 5 per cent compared with 15 per cent in July, while 21 per cent of investors say that GEM is the region they most want to overweight in the next 12 months.

The proportion of respondents favouring value over growth investing reached a record level of 48 per cent, while 59 per cent believe that large caps will outperform small caps, the highest reading in two years.