Investors are loading up on cash amid unnerving geopolitics

Global study by BoA Merrill Lynch reveals rising risk-aversion

Investors are loading up on cash amid unnerving geopolitics
Steve Randall

Investors sense trouble ahead and are positioning their assets accordingly.

A global study of fund managers by BoA Merrill Lynch revealed Tuesday that fears around geopolitics and the strength of the economy is leading to a pull-back from risk-taking and increased cash holdings.

“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?” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.

Among the concerns is rising levels of Chinese debt, which one third of the global panel of investors sees as the biggest tail risk while 36% say a geopolitical event is the greatest threat.

In response, average cash levels have reached a 7-year high of 5% of portfolios, while a net 22% are taking lower-than-normal risk, double the level of a month ago.

While they are building up their own cash reserves, investors are keen that companies’ cash is put to good use with a net 66% of the global panel saying that corporates are under-investing, up two percentage points on April’s figure. 60% say that “increasing capital spending” is the best use of cash flow, up from 58% last month.

Equities falling in favour, especially US
Overweighting equities has fallen in favour with a net 37% of the panel doing so compared to 45% a month ago.

Many are scaling back on banks and technology while adding to their utilities and energy.

The US is the least-favored region with a net 18% saying it’s the region they most want to underweight, up from a net 9% in April.

Forward-looking sentiment for emerging markets has improved slightly over the past month and a net 3% say it’s the region the most want to overweight.

A net 36% of global asset allocators say they are overweight eurozone equities, up from a net 30% in April.

“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 U.K. and Switzerland, while eurozone periphery debt is seen as the most crowded trade globally,” said Obe Ejikeme, European equity and quantitative strategist.