Investors have shown heightened risk aversion in the past month, reducing holdings in equities and commodities while adding to their allocations in cash and bonds, according to the
Bank of America Merrill Lynch Fund Manager Survey for June.

“The message from the survey this month, in my view, is one of stabilization, not capitulation,” said Patrik Schöwitz, European equity strategist at BofA Merrill Lynch Global Research.

Of the 282 panelists participating in the global survey, which was carried out between 3 and 9 June, the net percentage that are overweight in equities fell from 41 per cent to 27 per cent over the last month, while the proportion of asset allocators who are underweight in eurozone equities has risen from 1 per cent to 15 per cent, according to the survey.

By contrast, 18 per cent of the surveyed investors are currently overweight in cash, which is the highest level this statistic has been since June 2010, and is triple the proportion of the previous month. The average cash weighting held in these investors’ portfolios has increased from 3.9 per cent to 4.2 per cent over the last month, says the survey, which also indicates the proportion of investors taking below average risk in their portfolio currently lies at 26 per cent, up from 15 per cent in May.

Similarly, bonds have seen an increase in allocation over the last two months, demonstrated by the fact that the number of investors who are underweight in bonds has fallen to 35 per cent in June, down from 44 per cent in May and 58 per cent in April, according to the survey.

The survey reveals the investors’ defensive moves are primarily being driven by concerns over funding of the European sovereign debt, as 43 per cent of the survey participants consider this to be the biggest tail risk. Interestingly, two months ago commodity price inflation was the leading concern, said Schöwitz while speaking to journalists, but this month’s survey cites it as the second lowest of the major concerns among investors.

Investors also believe the prospect of strong growth in global profits is diminishing, but the general outlook on the global economy is calmer, according to the report. While economic optimism may have reduced, 64 per cent of asset allocators believe there will not be another round of quantitative easing, says the global survey.

“What they [investors] are telling us is this is just a soft patch. This is not actually going back into double-dip recession, the data is just not bad enough,” said Schöwitz.

“Fears on global growth will need to rise further before hopes for QE3 can begin to be priced in,” commented Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research.

With regards to sentiment towards emerging markets, the survey results depict a somewhat inconsistent outlook. The report states there is an overall positive outlook towards emerging market equities, supported by the finding that 29 per cent of investors believe that emerging markets are more likely to produce corporate profits than any other region, which is 10 per cent more than last month’s finding. Yet allocation to emerging market equities has fallen, with the proportion of investors who are overweight in this region falling from 29 per cent to 23 per cent over the last month.

The report is clear on growing pessimism over China’s performance, which it hails as “the engine of emerging market growth”.  Some 40 per cent of investors in emerging market regions, as well as Asia-Pacific including Japan, are of the belief that China’s economy will wane over the coming year, according to the report, which continues to say that this signifies the most pessimistic view of China in over two years. This is supported by findings in the survey that the proportion of global emerging market investors overweight China has fallen from 42 per cent to 33 per cent over the last month.

By contrast, the outlook on Japanese performance has become significantly more positive over the last two months, with 89 per cent of this month’s survey participants predicting the Japanese economy will grow. Predicted Japanese earnings per share has seen a turnaround in this two-month period, with 54 per cent of domestic respondents now expecting growth in earnings, while, in April, 33 per cent had expected Japanese earnings to fall.

Despite this, the proportion of asset allocators underweight in Japanese equities has increased from 17 per cent to 22 per cent over the last month, says the report. This chimes with the broader findings of the survey, which paint a picture of a broadly cautious approach being adopted by investors at the moment.

The survey’s findings in sector allocations further reinforce the current risk-averse sentiment of investors, showing reduced allocations in cyclical industries including industrials, discretionary and materials, while the traditional counter-cyclical sectors of pharmaceuticals and utilities received increased allocations.

Last month risk appetite stayed "robust" in the face of deteriorating growth expectations, but this reversed somewhat this month, noted Schöwitz. "However, there is absolutely no sense of investor panic," he said.