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Investors moving toward a ‘risk-off’ position amid geopolitical unrest, says BoAML survey

Global investors are moving toward a ”risk-off” stance, taking on greater protection as the prospect of geopolitical instability grows, according to the BofA Merrill Lynch (BoAML) Fund Manager Survey for March.

Responding at a point of growing tension in Ukraine, 81 per cent of investors said they see geopolitical risk posing a threat to financial markets stability – more than four times the reading one month ago.
Twenty-seven per cent of investors say that a geopolitical crisis is the biggest tail risk – up from 12 per cent in February.
At the same time, investors continue to express concern about the prospects for emerging markets – with sentiment towards China’s economy falling further.
Investors have reacted by showing reduced optimism about the prospect for corporate profits globally and by reining in risk. They have increased cash allocations, reduced equity holdings and taken on greater protection.
The proportion of investors taking lower than average risk in their portfolio has increased to a net 14 per cent from a net 2 per cent in February. A net 16 per cent of global asset allocators say that they are overweight cash, up from a net 12 per cent last month. Average cash balances remain high at 4.8 per cent of portfolios. The proportion of asset allocators overweight equities has dropped by nine percentage points month-on-month to a net 36 percent. Demand for protection against sharp falls in equity markets has increased to its highest level in 22 months.
“With neither inflation nor recession posing a threat, we believe the equity bull market is far from over and investors should be putting excess cash into risk assets,” says Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
“We see signs that recent exuberance in sentiment and positioning in Europe is waning. While Europe’s recovery remains in play, markets likely need to consolidate further before resuming their upward trend,” says John Bilton, European investment strategist.
Investors have scaled back their belief in a vibrant recovery in corporate profit growth – but remain positive. A net 40 per cent of global investors believe that global profits will improve in the coming 12 months, down from a net 45 per cent in February. A net 12 per cent say that it is unlikely corporate profits will rise by 10 per cent or more in the year ahead, up from 4 per cent of the panel taking that view in February.
At the same time, investor demand for companies to borrow and invest has eased. A net 34 per cent of respondents say that corporate balance sheets are underleveraged, down from a net 40 per cent last month. A net 63 per cent believe that companies are underinvesting, down from last month’s high of a net 67 per cent.
Sectoral allocations this month reinforce a defensive mindset with a sharp fall in allocations towards banks and a rise in allocations to energy companies and utilities.
Hedge fund managers provide an illustration of the risk-off mentality taking shape in this month’s survey, having reduced both leverage and exposure to equities. The weighted average ratio of gross assets to capital has fallen to 1.34 times from 1.49 times, the lowest in 20 months. Thirty-one per cent of hedge funds have a leverage ratio of less than one time – compared with 19 per cent in January.
Weighted net exposure to equities has fallen to 29 per cent, down three percentage points month-on-month from 38 per cent in January and the lowest since June 2012.
The investor panel has indicated that sentiment towards global emerging markets is close to reaching a low and that improvement is in sight. While the view towards China has deteriorated further, investors see scope to return to the region.
A net 47 per cent of regional fund managers in Japan, Asia Pacific and global emerging markets expect China’s economy to weaken in the coming year, up from a net 41 per cent a month ago. The proportion of global asset allocators underweight emerging market equities has risen two percentage points month-on-month to a net 31 per cent – a new record low.
On the brighter side, investors have indicated that they see value in the region. A record net 49 per cent of the global panel believes that emerging markets is the most undervalued of the regions, compared with a net 36 per cent in January. Furthermore, the proportion saying that emerging markets is the region they would most like to underweight in the coming year has fallen three percentage points month-on-month to a net 21 per cent.

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