Global investors scale back

April 24, 2012 | Last updated on April 24, 2012
3 min read

Eurozone woes have caused investors to scale back their risk tolerance and expectations for global growth, according to a Bank of America Merrill Lynch survey of fund managers for April.

As a result, investors have increased cash positions significantly around the globe. A net 24% of global asset allocators are overweight cash in April, up from a net 6% in March. Average cash balances rose to 4.7% of global portfolios, up from 4.2%.

Only 26% of asset allocators are overweight in equities, down from 33% in March. Within the equity space, fund managers have increased allocations to pharmaceuticals, a counter-cyclical sector, while reducing positions in materials, which is cyclical.

Concerns over European government finances have risen sharply and have affected exchanges on a global scale. Over half of the survey panel (54%) is concerned with EU sovereign debt funding. It’s considered the number one tail risk, up from 38% in March.

Read: Eurozone gets too much attention

While most panelists expect Spain to deliver negative surprises in coming months, France is also seen as a potential rough spot, with a 56% saying it could drag down markets. Respondents are evenly split in predicting the outcome of France’s presidential election, with 40% expecting a win for incumbent Nicolas Sarkozy and 39% predicting a win for leading contender Francois Hollande.

“Investors have moved to a more neutral position after positive shifts in sentiment and risk taking in the first quarter,” says Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research. “A sense of caution will remain throughout the second quarter.”

Read: Look to corporates as Europe heals

The prospect of further bad news about EU sovereign funding has ended four successive months of increasing optimism over global growth and reawakened interest in quantitative easing. In March, 47% of investors didn’t see the need for QE, but that number has dropped to 36%.

Meanwhile, 44% of investors are expecting the European Central Bank to engage in more direct, large scale QE before the end of the third quarter, up from 34% taking that view a month ago.

Confidence that the global economy will strengthen in the coming year dropped from 28% to 20%. However, sentiment has improved steadily from November, when 29% predicted economic deterioration.

Only 3% of the investors expect corporate profits will worsen in the next year.

Investors in Europe have turned bearish, with 24% predicting the region’s economy will deteriorate by 2013. Only a month ago, European investors were evenly split on the economic outlook.

Many global investors have increased allocations to U.S. equities in April in light of renewed optimism in the U.S. economy. About a third (27%) of global asset allocators are overweight in U.S. equities, up from 14% in March. The U.S. was favoured by investors overall, with the number of investors looking to go overweight rising from 2% to 18%.

Read: Managers bullish on U.S. equities

Investors within the U.S. are less optimistic. Only 8% of U.S.-based investors say the economy will strengthen and another 8% predict corporate earnings will fall.

One potential point of economic optimism from April’s survey is China. For the first time since 2010, investors are positive about China’s growth. They are proceeding with caution, though, since many global asset allocators reduced their emerging market overweights in April.

The survey consulted 191 managers with US$554 billion in assets under management.