Fund managers’ allocations to UK equities have dropped to a seven-year low, as managers see Brexit as the biggest tail risk for markets, Bank of America Merrill Lynch data shows.
The BAML fund manager survey highlights that global fund managers cut their UK equity allocations in May, falling from a net 20 per cent average underweight to a net 36 per cent average underweight. The underweight marks the lowest levels seen since November 2008.
The research found that Brexit has taken top spot as the biggest tail risk in the world, as ranked by the fund managers, ahead of China problems, the risks of failed central bank policy and US political turmoil.
Sterling also came under fire from fund managers, with 20 per cent seeing it as undervalued, marking the second highest reading on record.
The price of sterling has dropped ahead of the EU referendum, with many seeing it bear the brunt of the uncertainty over the vote outcome.
Elsewhere, fund managers are finding opportunities in the rebounding emerging markets. According to the research, allocations to emerging market equities turned positive in May for the first time in 17 months, with net 2 per cent investors overweight.
However, there is far from a consensus view on emerging markets, with shorting emerging markets being among the most crowded fund manager trades.
Fund managers are still wary of markets and waiting for opportunities, with cash balances rising to a 5.5 per cent high in May, up on the 5.4 per cent seen in April.
The cash levels are equal to that seen in July last year, when they were the highest since the financial crisis in 2008.
Michael Hartnett, chief investment strategist at BAML, says: “Although global growth expectations rose slightly from the previous month, investors continue to hold elevated cash levels to protect against potential shocks from Brexit, China and quantitative failure.”