Investors are sitting on the biggest “mountain of cash” since November 2001 as Brexit fears and uncertainties around US rates and the Chinese economy persist, according to the Bank of America Merrill Lynch.
Fund managers now hold 5.7 per cent in cash, up from an already high level of 5.5 per cent last month, while risk appetite and global equity allocations are at four-year lows, the bank’s global fund manager survey says.
BofA Merrill Lynch chief investment strategist Michael Hartnett says: “While corporate bond and US stock prices are at record highs, investors have a mountain of cash which means negative summer events could thus quickly become tradable buying opportunities.”
In May, the average fund manager was net 1 per cent overweight equities, down from 6 per cent last month.
However, allocations to emerging market equities improved to 21-month highs with an average net 6 per cent overweight from 2 per cent in May.
Allocations to Eurozone equities and Japan remained unchanged at 26 per cent overweight and 6 per cent underweight, respectively.
The survey also found that investors thought a Brexit scenario would be the biggest tail risk for the world economy, followed by “quantitative failure” and China currency devaluation.
Two-thirds of the fund managers surveyed said a Brexit is “unlikely” or “not at all likely”, which indicates why a record net 26 per cent think sterling is currently undervalued.
Waverton Investment Management fund manager James Mee says despite recent polls on the outcome of the EU referendum showing an increasingly marginal outcome, fund managers have remained “steadfast” in the belief that the UK will not vote to leave.
Mee cites responses from informal Deutsche Bank and Bloomberg surveys showed 83 per cent and 72 cent, respectively, believed the UK will stay in the EU.
He says: “Notwithstanding the recent outperformance of international stocks versus their domestic peers by 15 per cent since last October, few are positioned for a leave vote.
“The upshot of this is that, because the vast majority of money managers are going into the referendum positioned for ‘Bremain’, if there is a vote for Brexit there will be significant volatility in the markets. Our expectation is that this will not be limited to equities, nor to the UK market.”