Money managers continue to increase their cash holdings amid concerns about Brexit, China and “quantitative failure,” said Bank of America Merrill Lynch’s latest monthly fund manager survey.
Brexit — the U.K. potentially leaving the European Union — is now viewed as the biggest tail risk by money managers (27%), followed by devaluation/defaults in China (21%) and “quantitative failure” by central banks trying to revitalize economies (15%). Last month, “quantitative failure” was considered the biggest tail risk by managers.
In May, average cash holdings rose to 5.5% of managers’ portfolios, up from 5.4% in April, and U.K. equity allocations fell to a net 36% underweight, the lowest reading since November 2008, and compared to net 20% underweight last month. Also, a net 20% of investors believe the British pound is undervalued, the second most undervalued reading on record.
While the change in U.K. equity allocations suggests money managers “are prepared for the worst,” most investors (71%) still view Brexit as unlikely or not at all likely, according to the survey report.
Other findings from the global survey include:
- Global equity and bond allocations fell to a net 6% overweight and 41% underweight, respectively, down from a net 9% overweight and 38% underweight in April.
- Commodity allocations improved to a net 19% underweight from a net 22% underweight last month.
- U.S. equity, eurozone equity and Japanese equity allocations declined to a net 18% underweight, 26% overweight, and 6% underweight, respectively, vs. a net 10% underweight, 33% overweight and 3% underweight in April.
- Emerging markets equity allocations improved to a net 2% overweight, the first overweight reading in 17 months, and up from a net 8% underweight the previous month.
- A net 49% of managers surveyed expect two Federal Reserve rate hikes in the next 12 months, down from a net 54% in April.
- A net 15% of managers expect a stronger global economy in the next 12 months, up from a net 10% last month. However, a net 5% of managers think global corporate profits will deteriorate over the next 12 months.
- A net 50% of investors expect a weaker Chinese economy over the next year, up from a net 22% last month.
- A net 12% of managers think the U.S. dollar is undervalued, the highest reading in 10 months, while a net 20% and 17% think the Japanese yen and euro are overvalued, respectively, the highest readings in 19 and 10 months, respectively.
The survey of 205 money managers representing $619 billion in assets under management was conducted May 6-12.
